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Fixed Costs
Definition
Fixed costs are business expenses that remain constant regardless of production volume or sales, such as rent, insurance, and salaries.
Explanation
Fixed costs must be paid even when production is zero. Common fixed costs include rent, property taxes, insurance, base salaries, and equipment leases. High fixed costs create more risk during slow periods but can lead to higher profits during good times (operating leverage).
Managing fixed costs is crucial for business survival. Converting fixed costs to variable costs (outsourcing, commission-based pay) reduces risk in uncertain markets.
Example
A restaurant with $15,000 monthly fixed costs (rent, salaries, insurance) must generate enough revenue to cover these before earning any profit.