## Fixed Costs: What Are They and Why You Need to Know to Keep Your Business Alive

If asked, "What is the most frightening thing for a business owner," the answer is **fixed costs** that must be paid whether the business sells 100 baht or not at all. Understanding fixed costs and variable costs is not just an accounting theory; it’s a survival skill for managing a business.

### Fixed Cost ( – The unavoidable portion of expenses

**Fixed costs** are expenses that remain unchanged regardless of how much the business produces or sells. Whether sales are booming or declining, these costs must be paid—month after month, no exceptions.

) What are fixed costs? – Daily business essentials

**1. Rent – The recurring killer**
Whether your storage room is full of products or empty, the landlord still expects payment every month. Negotiating rent is often a challenging task for business owners.

**2. Employee salaries – The human resources to sustain**
Full-time employees are assets, but they are also fixed expenses that must be paid according to contract, whether the workload is high or low.

**3. Insurance – The safeguard**
Property insurance, employee insurance, liability insurance—all are regular payments to protect the business.

**4. Loan interest and depreciation of machinery**
If you buy expensive machinery with a loan, you’ll need to pay both interest and depreciation costs every month.

### Why are fixed costs so important? ###

**First point: Pricing strategy**
Without calculating fixed costs, the set price might be too low, leading to high sales but low profit, eventually causing business failure.

**Second point: Setting sales targets**
Knowing how much fixed costs are per month allows you to calculate "the minimum sales needed to break even," called the Breakeven Point.

**Third point: Investment decisions**
Before purchasing expensive machinery, ask yourself, "How much will fixed costs increase, and is it worth it?" Wrong decisions can lead to lifelong debt.

## Variable Costs (Variable Cost ) – Expenses that can be avoided

Unlike fixed costs, **variable costs** change according to sales volume. Selling more requires higher expenses; selling less reduces costs.

### What are variable costs?

**1. Raw materials**
If producing goods, raw materials increase with the number of units produced.

**2. Direct labor**
Workers paid per piece or per unit of output.

**3. Packaging and shipping**
The more you sell, the more boxes/packaging needed, and shipping costs increase.

**4. Sales commissions**
Higher sales mean higher commissions paid to the sales team.

### Key differences to understand

| Feature | Fixed Costs | Variable Costs |
|-------|--------------|----------------|
| **Change** | No change regardless of sales | Change according to sales volume |
| **Flexibility** | Difficult, very difficult | Good, can be reduced |
| **Examples** | Rent, salaries | Raw materials, transportation costs |
| **Impact on profit** | The less you sell, the more you lose | The more you sell, the higher the profit |

## Analyzing Mixed Costs for Smarter Decisions

**Total Cost** = Fixed Costs + (Variable Cost per unit × Number of units sold)

Knowing this formula helps you to:

**1. Calculate the Breakeven Point accurately**
How many units need to be sold to cover expenses without loss?

**2. Set appropriate selling prices**
Avoid overestimating sales that may never materialize.

**3. Evaluate "what if" scenarios**
If raw material prices increase, how much will profit decrease?
If rent can be reduced by 50%, how much will profit increase?

**4. Make better investment decisions**
Is purchasing machinery (increasing fixed costs) worth it compared to saving on labor (reducing variable costs)?

## Tips to Prevent Fixed Costs from Killing Your Business

**First: Reduce fixed costs at startup**
Avoid renting large offices or buying expensive machinery initially. Grow gradually.

**Second: Design a flexible business model**
Use flexible labor—hire based on workload, and only hire full-time when profits are certain.

**Third: Monitor fixed costs diligently**
Sometimes stopping unnecessary services can save significant money.

## Summary

Understanding **what fixed costs are** and **variable costs** is not a luxury but a necessity for business owners. It’s the foundation of good financial management. A business that only learns accounting 101 but doesn’t grasp costs often ends up closing. Conversely, a business that understands costs—regardless of success or failure—can plan wisely, set appropriate prices, and survive in the market for the long term.