Last week, I talked with a small business owner. He said he didn't know why his costs were so high that he wasn't making a profit. I asked him if he had separated his costs to review them. It turned out he had never done that. That's the main problem with most businesses: it's not that costs are high, but that they don't understand the true costs.

Every business must pay two types of expenses: fixed costs that do not change regardless of sales, and variable costs that increase with sales volume. If you understand this difference well, you can manage your business much more intelligently than others.

Starting with fixed costs, these are expenses that the company must pay every month, every year. It doesn't matter how much you sell. Office rent, employee salaries, insurance, loan interest—all of these are fixed costs. The business must pay them whether it's busy or quiet. The importance of understanding fixed costs is that it helps you set the right product prices. If you don't know how much your fixed costs are, you won't know how much you need to sell to break even.

In contrast to fixed costs, variable costs are expenses that change according to production or sales volume. The more you sell, the higher the variable costs. The less you sell, the lower the variable costs. Variable costs include raw materials, direct labor, packaging, shipping, and sales commissions—all directly related to production and sales.

Why separate these two types of costs? Because it helps you make better decisions. For example, if you know your fixed costs are high, you might need to find ways to reduce them or increase sales significantly to cover those costs. If you know that variable costs make up most of your total costs, you might need to find ways to reduce raw material or labor costs.

Analyzing both types of costs together is called mixed cost analysis. This is a very powerful tool that helps you see the overall picture of your business's costs. Use it for pricing, production planning, resource allocation, and assessing competitiveness.

In fact, if you understand that variable costs are the easiest to control, and fixed costs are the long-term planning part, you'll know what to do to grow and sustain your business in the market. Good cost management isn't as complicated as it seems. It's just about clear separation and making mindful decisions.