Comparing fixed and variable costs
Every business, no matter its size, incurs both fixed and variable costs. But cost structure differs greatly from industry to industry. If you’re a graphic designer who works from a home office, your fixed costs will be very different from those of a restaurant owner or a furniture manufacturer.
Taking into account your fixed costs (easy to predict) and your variable costs (not so easy to predict) can give you important information about the health of your business. Your ability to plan for growth or handle a downturn is fundamental to your continued success.
Let’s compare the fixed and variable costs of a few different businesses.
A graphic designer working from home
The fixed costs of rent, utilities, insurance, and security associated with commercial space are among the reasons many startup businesses operate out of a home office. A graphic designer can “open shop” for the cost of a computer, web hosting, and the necessary software. They can set up in a spare room (or corner) of their home, and they can meet with clients on the phone, online, or even in person at a nearby coffee shop.
Running a company out of their home can dramatically reduce their fixed costs, allowing them to be more profitable. The relative lack of space may limit the amount of business they can conduct long term, but it’s a viable option if they’re just starting out or plan to remain a small operation.
Variable costs for a graphic designer working from home may include new software, office supplies, advertising fees, business cards and official letterhead, transportation, additional courses to help hone their skills, and travel to conferences.
A restaurant owner
A restaurant owner will need a brick-and-mortar space in order to do business, so rent and insurance will be among their most notable fixed costs. Even if they opt for a delivery-only model, they still have to prepare food in a commercial kitchen that meets all health and safety standards. A traditional restaurant will also need seating space, furniture, and access to parking or public transportation. Location will be a major factor in what type of clientele the restaurant can attract and how expensive the rent will be.
Variable costs for a restaurant owner include food, beverages, paper goods, wages for non-salaried employees, uniforms, and janitorial services. All of these costs will rise with an increase in business and contract when things are slower.
A furniture manufacturer
A manufacturing firm—like a high-end furniture maker, for instance—will also have substantial fixed costs. They’ll need commercial space, both for fabrication and storage. Large equipment and tools used to create the pieces may depreciate over time. They might need vehicles like forklifts to move raw materials in and out of the factory space, and the business might invest in its own trucks to deliver the goods.
Variable costs for a furniture maker could include raw materials, wages, packaging, and gas for delivery trucks. These costs will increase as production ramps up during certain times of the year.
Apples and oranges
Fixed costs can be similar across industries: A restaurant and a furniture shop both need a lot of space and specialized equipment. But it’s rarely useful to compare the variable costs of 2 companies in different industries. Looking at the variable costs of 2 restaurants would make much more sense than comparing the ingredients necessary to make a pizza and the raw materials needed to make a dining room set.
But both fixed and variable costs differ dramatically when looking at a small, one-person service business that can be operated entirely online versus a business that requires physical space and multiple people to help run it.