Everything you need to understand and distinguish between fixed and variable costs

What are a company's fixed and variable costs? Distinguishing between these two types of expense is of vital importance to entrepreneurs and company managers in assessing the profitability of their business, while controlling the inherent costs.

It's a good idea to look at the question of variable costs as soon as you set up your business: you'll gain overall visibility and be better able to estimate the costs you need to plan for.

Generally speaking, having a clear idea of your company's variable and fixed costs is one of the keys to better overall management of your business. Let's take a closer look at these accounting entries.

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Variable expenses

Definition

Variable expenses, also known as "operating expenses" or "business expenses ", vary according to the company's activity.

The greater the company's activity, the higher the total amount of variable expenses.

These shares vary :

• over time (from one month to the next, for example),
• as a function of business volume.

Examples of variable expenses

• raw material costs (supplier costs),
• distribution costs,
• commissions,
• payment of subcontractors,
• variable part of salaries,
• logistics costs,
• travel expenses, etc.

The amount of variable expenses is used to define the margin on variable costs.

Fixed costs

Definition

Fixed costs are also referred to as "structural costs" or "overheads".

These are expenses charged to the company, whatever its sales or production volume.

They imply a regularity of payment: they are regular expenses to be provided for in the company's accounts.

Fixed costs are financed by the margin on variable costs.

Examples of fixed costs

• Rent, whether for purchasing or leasing premises,
• energy consumption, such as electricity,
• insurance
• subscriptions (internet, software, etc.),
• depreciation of fixed assets,
• certain fees (accountant, lawyer),
• salaries and expenses,
• taxes (cotisation foncière des entreprises, corporation tax, VAT where applicable).

Table of fixed and variable costs and differences

Summary table of fixed and variable costs :

Mixed expenses

Mixed expenses, or "semi-variable expenses", are made up, as their name suggests, of a variable part and a fixed part.

Is the salary a fixed or variable expense? It all depends! For example, the salary of a sales executive with a fixed part and a variable part (target-based bonuses) represents a mixed expense.

Why calculate fixed and variable costs?

Distinguishing between variable and fixed costs, and tracking them via a dashboard, enables you to manage your business and measure :

• the profitability of its business model,
• the weight of its various costs on sales.

It can be used to :

• establish
  • the cash flow plan,
  • the income statement;
• calculate
  • margin on variable costs,
  • sales margin,
  • break-even point, etc.

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The importance of differentiating between fixed and variable costs

A few tips to conclude this article:

Tip 1 ^: Reassess your company's break-even point on a regular basis - once a year, for example.
Tip 2 ^: Talk to your chartered accountant to validate your accounting vision and the resulting strategy.
Tip 3 ^: This will enable you to take measured risks to drive your business forward, without falling below the break-even point.