The Entrepreneur’s Guide to Fixed vs. Variable Costs: How to Stay Profitable
- May 1
- 5 min read
Mastering the Money Game: Week 2
Welcome back to Mastering the Money Game! In our first post, we talked about why a clear budget and smart expense control are the bedrock of a thriving business. Think of them as your business's vital signs – you need to know what's happening to stay healthy.
This week, we're going deeper into the anatomy of your business finances by looking at your costs. Not all expenses are created equal, and understanding the two main types isn't just for accountants; it's essential knowledge for any entrepreneur who wants to build a business that consistently makes money.
Let's cut through the jargon and talk about Fixed Costs and Variable Costs. Understanding these isn't just about numbers; it's about gaining control, making smarter decisions, and unlocking the potential for true profitability.
The Two Faces of Business Costs
Imagine you're running a small business that sells custom-printed t-shirts. You have a space where you work, equipment, and you buy blank t-shirts and printing supplies to make your products.
Your costs fall into two buckets:
Fixed Costs: These are the expenses that tend to stay the same no matter how many t-shirts you make or sell.
Think of your rent for the workspace. Whether you print one shirt or a hundred, the rent is the same this month.
Maybe you have a monthly subscription for design software or a business phone line. That bill doesn't change with your sales.
Perhaps you pay yourself a consistent small salary or have a fixed monthly payment on a loan for your printing equipment. These are usually fixed.
These costs are like the constant beat of a drum in your business – they are always there, regardless of your rhythm of sales. You have to cover them whether business is booming or slow.
Variable Costs: These are the expenses that change directly with how many t-shirts you make or sell.
Each t-shirt you print requires a blank shirt. The more shirts you sell, the more blank shirts you need to buy. This cost goes up and down depending on your sales volume.
The ink you use for printing is a variable cost. One shirt uses a little ink; a hundred shirts use a lot more.
If you pay a commission to someone for every sale they make, that commission is variable. It only happens when a sale happens.
Shipping costs for each order are variable.
These costs are like the volume of a song – they get louder as your sales get higher, and quieter when sales dip.
Why This Distinction is Pure Gold for Your Business
Knowing which costs are fixed and which are variable is where the magic happens. It's not just an accounting exercise; it's the key to understanding your business's core financial health and potential.
Understanding Profitability: This is the big one! If you sell a t-shirt for $20, how much money do you actually make on that single shirt? You need to subtract the variable costs associated with making that specific shirt (blank shirt cost, ink cost, packaging, shipping). This gives you the Contribution Margin per unit – the money each sale contributes towards covering your fixed costs and then generating profit.
Example:
Selling Price per shirt: $20
Variable Costs per shirt (blank shirt $5, ink $2, packaging $1, shipping $3) = $11
Contribution Margin per shirt: $20 - $11 = $9
This $9 is what helps you pay for rent, software, etc.
Finding Your Break-Even Point: Once you know the contribution margin per unit, you can figure out how many units you need to sell just to cover your fixed costs. This is your break-even point. Selling anything beyond this point means you're making a profit on each additional sale (equal to the contribution margin).
Example:
Let's say your total Monthly Fixed Costs (rent, software, loan) are $900.
Contribution Margin per shirt is $9.
Break-Even Point (in shirts) = Total Fixed Costs / Contribution Margin per Unit = $900 / $9 = 100 shirts.
You need to sell 100 shirts just to cover all your costs. Every shirt you sell after the 100th one adds $9 directly to your profit.
Smart Pricing and Strategy: Knowing your costs helps you set prices that don't just cover variable costs but leave enough margin to tackle fixed costs and build profit. It also helps you think strategically. If you want to increase profitability, should you focus on selling more shirts (affecting variable costs) or finding ways to reduce fixed costs (like finding a cheaper workspace)?
Planning for Growth (or Downturns): If you plan to double your sales, you know your variable costs will roughly double too. But your fixed costs might stay the same! This understanding allows you to project future profitability more accurately. Conversely, if sales drop, you know your fixed costs remain a challenge, guiding decisions on where you might need to cut back or find new income streams.
This deep dive into fixed vs. variable costs isn't just theory; it's the backbone of building sustainable revenue models. It moves you from hoping you're profitable to knowing why you are (or aren't) and making conscious decisions about it.
How SHIFT Empowers Your Financial Acumen
Mastering these financial concepts is a cornerstone of the "Save Your Money" pillar in the SHIFT Approach. SHIFT Enterprise Academy is designed to provide young entrepreneurs with the financial literacy and economic planning tools needed to manage money effectively and track spending.
Through the SHIFT Learning Management System (LMS) and our tailored courses, you gain access to practical insights, frameworks, and exercises that make concepts like fixed vs. variable costs easy to understand and apply. We help you develop the critical thinking and data-driven decision-making skills necessary to analyze your costs, determine profitability, and strategically plan for reinvestment and long-term growth.
Understanding your costs gives you the clarity to navigate the entrepreneurial journey with confidence, turning potential struggles into stepping stones for sustainable success.
Are you ready to break down your business costs and build a clearer path to profitability?
Start by listing out all your business expenses from the last month. Then, go through each one and ask: "Would this cost exist if I sold zero products or services?" If the answer is yes, it's likely fixed. If no, and it changes based on sales volume, it's variable. This simple exercise is your first step to mastering your money game.
Join the SHIFT community and unlock the resources to deepen your financial understanding and build a truly sustainable venture.
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