Recently, I’ve been thinking about a question: why do some businesses seem to have good revenue, but the owners still say they’re not making money? It wasn’t until later that I realized many people simply don’t understand the difference between fixed costs and variable costs. If you don’t get these two things right, your business can easily be overwhelmed by costs.

Let’s start with fixed costs. In simple terms, these are the expenses you have to pay every month regardless of how well your business is doing. For example, office rent—whether you sell 100 products this month or just 1, the rent still needs to be paid. Employee base salaries are the same; once the staffing plan is set, wages must be paid each month. Depreciation of equipment, insurance fees, and so on are also fixed costs. The characteristic of fixed costs is stability—they stay the same regardless of output.

This is why many startups tend to fail. They invest heavily in fixed costs early on, but sales haven’t picked up yet, and cash flow becomes tight. Therefore, understanding fixed costs is especially important for financial planning. You need to first calculate how much you need to sell each month to cover these fixed expenses—that’s what’s called the "break-even point."

Next are variable costs, which are much more flexible. The more you produce, the higher the costs; produce less, and the costs decrease. Raw materials, direct labor, packaging, and shipping costs all fall into the category of variable costs. If this year’s orders increase, these costs naturally go up; if orders decrease, costs follow suit. This gives businesses some room to adjust.

I think the most critical point is that many business owners only look at total revenue, not at the cost structure. For example, with the same monthly revenue of 1 million yuan, one business might have fixed costs of only 200k yuan, while another’s fixed costs are 500k yuan. Their profits can differ by double. That’s why pricing, capacity planning, and even whether to automate production all need to consider the cost composition.

Honestly, if you want your business to be more stable, you need to learn how to analyze the ratio of fixed costs to variable costs. Industries with high fixed costs (like manufacturing) require higher sales volume to break even; industries with high variable costs (like service industries) are more flexible. Some companies choose to outsource to reduce fixed assets, turning fixed costs into variable costs, which lowers risk.

In summary, understanding the difference between fixed costs and variable costs allows for more rational decision-making. Whether it’s pricing strategies, capacity planning, or investment decisions, this foundation is essential. Many businesses that seem to be "making money" actually have thin profit margins because they haven’t managed costs well. If you’re running a business or investing in projects, it’s worth carefully analyzing your cost structure—you might find some surprising insights.