What Are Fixed Expenses
These are costs or expenses that are fixed and that which does not change. Even if sales increases or decreases these costs remain constant. Example being rent of office building, salaries of employees who are permanent, depreciation on assets etc. There are two components in the company’s overhead costs, one being variable expenses and the other fixed expenses.
As stated above these expenses do not change with the value of sales, sometimes they may do so over a period of time. Hence certain industries use the term periodic costs instead of fixed expenses. Certain fixed costs like promotional expenses do occur even if the sales fall to zero. Hence it is very important to know that all non discretionary costs will have to be incurred even if sales are zero.
Though it is the production and sales volume that are the main factors in determining the fixed expenses, they may also fluctuate sometimes. This can happen due to other factors like hike in supplier’s prices or change in the economic conditions etc. Here the small business units need to understand how a variety of costs react to the production of goods and services. This kind of businesses can make a study of fixed and variable expenses to arrive at a breakeven point to determine how these costs affect the production and sales.
Once the company has listed out the fixed expenses it is time for managing these costs. There are several ways to manage these costs:
Necessary Vs unnecessary: the best way to manage the fixed costs is to eliminate the ones that are not required. The firm has to decide which fixed costs are needed. But if the company has any mortgage payments to be made, then they cannot get rid of such expenses.
Downsizing the company: where the company feels that it is using more workforces then it is wise for them to downsize the organization. In doing so the salaries that are considered fixed costs will be reduced. The firm must keep a check on these fixed costs which directly influence the production and sales volume.
Sort out one by one: the organization must revise its budget to find out which fixed expense can be cut out without affecting the production. It is for this reason that it should study every expense one at a time. The firm can also benchmark priority wise the payments to be made. For example since the office building is required for production purposes the company may pay the rent at the first place. In this way the company can realize at a glance even if it pays any extra fixed expenses.
A company’s financial stature is very important for it to run the business, so how ever tight it is they have to learn to balance the two important variables namely fixed expenses and variable expenses.