## Fixed Costs and Variable Costs: Entrepreneurs Must Know to Manage Profits

If you're planning a business or trying to increase profits, the first thing to understand is how your costs are divided. Total operating costs can be categorized into two main types, each with different behaviors and impacts on profit.

### Costs refer to expenses or resources that a business must use.

Costs are not just about spending money but include everything you have to sacrifice to design products or provide services. Understanding costs will help you set prices cleverly and know how much you need to sell to break even.

## Fixed Costs: Expenses That Are "Unwavering" Regardless of Sales Volume

Fixed costs refer to expenses that do not change whether you sell a lot or a little. They are costs that you are "obliged" to pay every month, regardless of whether your business is operating at full capacity or not.

### Characteristics of Fixed Costs

These costs are highly stable. If you can forecast how much you need to pay each month, you can plan your (Cash Flow) more confidently. However, the higher the fixed costs, the more you need to sell to cover those costs. This is why choosing the right production system and business location is very important.

### Common Examples of Fixed Costs

**Rent** - Whether you sell a lot or none on certain days, rent still needs to be paid according to the contract.

**Salaries of permanent staff** - Generally, full-time employees receive a fixed salary regardless of sales performance.

**Insurance** - Building insurance, liability insurance, product insurance are all regular expenses that do not depend on sales volume.

**Loan interest** - If you have borrowed from a bank or lender, interest must be paid regularly whether the business is profitable or not.

**Depreciation of equipment** - Machinery, land, and buildings you purchase must be depreciated annually.

## Variable Costs: Expenses That "Adjust According to Sales"

Variable costs are expenses that are directly related to the volume of production or sales. The more you sell, the higher these costs will increase.

### Flexibility of Variable Costs

The advantage of this type of cost is that you can reduce it if sales slow down. For example, if sales are low this week, you can order fewer raw materials, pay less variable wages, which helps prevent the business from drowning during sales downturns.

### Examples of Variable Costs in Operations

**Raw materials and components** - The more you produce, the more raw materials you need to buy. No raw materials means no production.

**Direct labor** - Workers hired per task or paid per piece, increasing as production increases.

**Packaging and shipping** - The more products reach customers, the more packaging and shipping costs you incur.

**Commissions** - If you pay sales staff a percentage of sales, that is a clear variable cost.

**Electricity and water** - Increased production consumes more energy. This often includes both fixed and variable components.

## Fixed Costs vs. Variable Costs: Impact on Decision-Making

Distinguishing between these two types of costs is important in many situations.

( When Deciding on Investing in New Machinery

If you're considering investing in automation equipment, you need to consider that this will increase fixed costs )depreciation, maintenance( but may reduce variable costs )labor, waste###. This is called **Trade-off Analysis**, which should be calculated to see if the investment is worthwhile.

( When the Market Weakens

If profits decline, businesses with high fixed costs are at greater risk of loss than those with high variable costs because fixed costs must be paid regardless of income.

) When Scaling Up

If a business wants to grow quickly, those with high variable costs have an advantage because they can increase production without large upfront payments, but costs will gradually increase as output expands.

## Break-Even Point (Break-Even Point): The Minimum Sales You Need to Know

Knowing these cost types helps you calculate the ###BEP###, which is the minimum sales volume needed to avoid losses and not make a profit.

**Simple formula:**
Break-even point = Fixed costs ÷ ((Selling price per unit - Variable cost per unit))

Once you know this number, you'll understand, "Oh, I need to sell at least X units per month to break even." This knowledge is crucial for setting sales targets and making business decisions.

## Tips for Cost Management

**Reduce fixed costs:** Try renegotiating leases, reducing inventory, or downsizing the business location if possible.

**Adjust variable costs:** Negotiate with suppliers for lower raw material prices, improve production efficiency.

**Analyze relationships:** Understand how each type of cost increases as sales volume changes.

**Scenario planning:** Calculate "If I change this cost, how will profit be affected?" to prepare for different situations.

## Summary

Fixed costs are expenses that do not change, while variable costs adjust according to sales volume. Understanding these differences is not just an accounting matter but a key to designing a sustainable business. Smart entrepreneurs will weigh these costs carefully to ensure the business can grow well both in normal times and during market challenges.