Fixed costs are a counterpart to variable costs, and are extremely useful when running a business. Knowing in full about the usage and definition of fixed costs is how effective budgeting is done. That being said, how exactly do you define fixed costs, and how do you use them?
Defining fixed costs
Fixed costs are directly defined as a cost that does not go up or down with the sales of a business as opposed to variable costs which do. General examples of fixed costs would include rent, utilities such as water or heating, and insurance.
Fixed costs for sole traders
As sole trader businesses are far smaller than corporate businesses or even limited companies, their fixed costs change. A major example of this is wages. Sole traders might only have one or two employees at their maximum before they should consider becoming a limited company. Due to this, employee wages should be considered a variable cost (depending on the trade) as wages will often be paid to other sole traders.
Keeping track of fixed costs
Fixed costs are what mainly fill up budgeting sheets and account for a business’s expenses. All fixed costs should be kept track of as accurately as possible so that the business can ensure it is covering them.
Fixed costs can be directly accounted for in a budget by having them as a negative value. This means that you know the minimum needed in order to keep non-variable costs satisfied between defined periods.