How to compare a business's fixed and variable costs

Short answer: fixed costs are those that stay the same when sales change, such as rent; variable costs grow or shrink with volume, such as raw materials. To compare them, list the month's expenses, classify each one and see how much each group represents of revenue.

Before you start

• Statements, receipts and bills for the last month, preferably three months.
• A simple spreadsheet with three columns: expense, amount and type.
• The sales figure for the same period.

Steps

1. List all of the business's expenses, including the small ones.
2. Classify each one as fixed or variable. If the amount changes when you sell more or less, it is variable.
3. Add up each group separately.
4. Calculate the weight of each group relative to the period's revenue.
5. Identify mixed costs, such as electricity, which have a fixed part and a variable one, and separate them roughly.
6. Compare different months to see what changes and what stays.
7. Use the result: the difference between revenue and variable costs is what is left to cover the fixed ones.

An example

A shop makes $20,000 in revenue in the month. Variable costs, such as goods and packaging, add up to $11,000. Fixed ones, such as rent and salaries, add up to $6,000. After variable costs $9,000 is left, and after fixed costs, $3,000. This is an illustrative example.

Common mistakes

• Leaving small expenses out.
• Calling everything fixed for convenience.
• Ignoring the owner's time as a cost.
• Looking at a single month, which may be atypical.

Review the classification from time to time. A cost that was fixed can become variable when the business changes its model, for example by outsourcing a step, and the opposite also happens. Keeping the list up to date avoids decisions based on old numbers.

Next step

With the classification done, calculate the business's break-even point. The break-even calculator below helps you do the math with your own numbers.

Related tool: Business Break-Even Calculator