Fixed costs

Costs that do not change with sales volume in the short term — rent, salaries, software subscriptions, insurance.

Example

Your £4,000 monthly salary bill is the same whether you sign two customers or twenty.

Important

Fixed is only fixed within a range and a timeframe. Hire someone and your fixed costs step up permanently — which is why a hire is a much bigger decision than its first month's cost suggests.

Related terms

• Variable costs — Costs that rise and fall directly with each additional unit sold — payment fees, per-seat API costs, shipping, delivery labour.
• Contribution margin — Revenue from a unit minus all the variable costs of producing and selling that unit — a step beyond gross margin because it also includes variable selling costs.
• Break-even point — The level of sales at which total contribution margin exactly covers fixed costs, so profit is zero. Fixed costs ÷ CM ratio gives it in revenue; fixed costs ÷ contribution margin per unit gives it in units.
• Operating leverage — How much profit changes for a given change in revenue. High fixed costs and a high CM ratio mean profits swing hard in both directions.
• Operating expenses (OpEx) — The costs of running the business that do not scale directly with each sale — salaries, rent, software, marketing, legal.

Lessons that explain it

• Fixed and variable costs — The split that decides what happens when you grow, shrink, or have a bad quarter. Most founders classify their own time as neither, and that is where the trouble starts. (11 min)
• Contribution margin and the CM ratio — How much of each sale is left to cover everything else. One number, and it answers most of the questions founders take to spreadsheets. (13 min)
• Break-even and operating leverage — The revenue that makes you self-sufficient, and why the same structure that makes growth spectacular makes a bad quarter dangerous. (12 min)

All 176 terms in the Founder glossary