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What’s the Difference Between Fixed Costs and Variable Costs?

by Adam Zuchetti

2 min read

Some operational costs are static, while others fluctuate. It’s important to know the difference between fixed and variable costs, and how to budget each accordingly.

In business, not all costs are the same. It is crucial for firms to effectively manage the payment of both fixed and variable operational expenses to maintain commercial viability.

Here’s a breakdown of the most common business costs and tips on budgeting for them.

Fixed Costs

Specific costs are the most easy to budget, as they remain fixed throughout the financial year and tend to be predetermined.

Telephony and internet costs, for instance, can be packaged into monthly plans and paid in regular instalments; insurance policies are calculated for the year ahead; loan repayments are determined at the time the loan is paid down; and regulatory fees (such as business registration) are fixed in advance each year.

Variable Expenses

For companies, just like individuals, there’s nothing more certain in life than taxes. Yet the actual amount of tax a company is required to pay each year can vary drastically according to a range of factors.

This can include the company’s profit or loss (corporation tax), capital gains on any asset sales (CGT), number of employees (payroll tax), any real estate purchases (stamp duty), non-monetary income (fringe benefits tax), in addition to GST contributions.

On top of this, there can be special government rebates, incentives or tax concessions provided in any given financial year, at state and federal levels.

Operational expenses can also rise and fall depending on the company’s level of activity. For instance, a growing business will generally incur higher costs as it takes on additional staff and commercial space to undertake increased work volumes.

Cost Reduction

By their very nature, variable expenses can be difficult to monitor and restrain, since they are dependent on ever-changing factors. Yet even fixed costs, when compared to their return on investment, can be intrusive to a company’s financial health.

Some means of reducing operational expenses include:

Outsourcing non-core business functions
Utilising free software and tools such as Skype for long-distance and video telephony
Pre-negotiating long-term supplier rates
Reviewing annual expenses, such as insurance and utilities, against competitor quotes
Capitalising on government grants and assistance for small business
Claiming your full tax-deduction entitlements – a good accountant can be worth their weight in gold!

Regardless of whether you know the value of a cost in advance, be active in itemising your operational expenses and allow sufficient funds to cover them. Together with restraining cost outflows and maximising the use of entitlements, your budget will benefit from having a clear understanding of the costs of your business.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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