Scaling a business brings fluctuating sales and variable costs, while fixed costs like rent, insurance, and salaries stay constant—putting pressure on cash flow and profits during slower periods.

That’s why understanding your fixed costs is so important. They’re the stable part of your small business budget that can help you price your products or services more accurately and see where your profit margins really stand. 

Fixed costs can rise over time due to rent renewals, insurance premiums, or new contracts, and because many are tied to long-term agreements, they’re not easy to reduce quickly if revenue dips.

With a tool like QuickBooks Expense Tracker, you can track fixed costs in real time, spot increases early, and plan adjustments before they put pressure on your bottom line.

What are fixed costs?

Fixed costs are the expenses your business pays regularly, regardless of production or sales. Unlike variable costs, they don’t change with sales volume. This predictability makes them a key part of financial planning, helping you:

• Set accurate pricing
• Manage cash flow
• Forecast profits more reliably

Overlooking fixed costs can lead to underestimating expenses and overstating profitability.

Two main ways to look at fixed costs:

• Total fixed costs:
• Sum of all fixed expenses your business pays in a set period (monthly or yearly)
• Highlights the portion of costs that stays constant before adding variable expenses
• Average fixed costs:
• Total fixed costs divided by the number of units produced
• Shows how fixed expenses are spread across each unit
• Cost per unit decreases as production increases

Fixed cost formula

To calculate your fixed costs, start with your total production costs. Then subtract the total variable costs (variable cost per unit × number of units produced).

This fixed costs formula is one of the important common accounting equations businesses use to understand costs and profitability. It shows the portion of your expenses that don’t change, regardless of sales or production volume.

Calculating fixed costs per unit 

To see how fixed expenses affect your pricing, extend the fixed cost formula to calculate the cost per unit. Simply divide your total fixed costs by the number of units produced.

As production increases, the fixed cost per unit decreases. This insight helps you set competitive prices and track efficiency as your business scales.

How to calculate fixed costs in your business

Knowing how to calculate fixed costs gives you confidence in your financial planning. Here’s a simple process to identify and calculate them accurately:

Step 1: List your business expenses

Write down all your common business expenses—like rent, salaries, insurance, and loan payments. Keep the same timeframe for all of them (monthly or yearly).

Step 2: Separate fixed costs from variable costs

Identify which expenses stay the same (fixed) and which rise or fall with sales or production (variable).

Step 3: Add up your fixed expenses

Total all of your fixed costs for the period you’re reviewing. Double-check with your income statement or accounting reports to ensure nothing is missed.

Step 4: Double-check for semi-variable costs

Some expenses have both fixed and variable parts. For example, your electricity bill may include a flat service fee plus usage charges. Only count the fixed portion here.

Step 5: Calculate your total fixed cost

Apply the fixed cost formula to confirm the number. This gives you a clear picture of the expenses that remain constant in your business and helps you plan as your business grows.

Fixed vs. variable costs

To understand your expenses fully, it’s helpful to see how fixed and variable costs work together to fully understand your expenses.

• Fixed costs: Expenses that do not fluctuate with business activity. Examples include rent, insurance, salaries, and loan payments.
• Variable costs: Expenses that change in direct proportion to production or sales levels. Examples include raw materials, packaging, shipping, and sales commissions.

Together, fixed and variable costs can help you determine your contribution margin—a measure of how much profit is left after covering variable costs.

Why fixed costs matter

Fixed costs are the baseline expenses your business must pay, no matter how sales fluctuate. They’re the overhead you commit to—like rent, salaries, and insurance—even in slower months. 

Here’s why understanding them matters: 

• Budgeting: Fixed costs show the minimum money you need each month to keep the business running.
• Pricing: Knowing your fixed costs prevents underpricing. It shows how much revenue your products or services must bring in (along with variable costs) before you start making a profit.
• Financial planning: Fixed costs are key for calculating your break-even point—the sales level where you cover all expenses. Beyond that point, operating leverage comes into play, where profits rise faster than costs. Understanding both helps you plan growth and set realistic financial goals.

Fixed costs examples you might encounter in your business

Fixed costs show up in every business, no matter the industry. They are predictable, recurring expenses that don’t change with sales. Common examples include:

• Monthly rent or mortgage payments
• Insurance premiums
• Salaries of permanent staff
• Property taxes
• Loan payments

Many small businesses start out tracking these costs with spreadsheets or even paper records. While this can work early on, it quickly becomes time-consuming and error-prone as the business grows.

This is where accounting software, like QuickBooks, helps. It automatically tracks and categorizes expenses, making it easier to separate fixed from variable costs and understand exactly where your money goes.

Example 1: A retail shop

A local clothing boutique pays $3,000 per month in rent, $600 for insurance, and $7,000 for staff salaries. Even if sales slow down, those fixed costs remain the same. Combined, that’s $10,600 in fixed costs every month—a baseline the owner must cover before making a profit.

Example 2: A service-based business

A marketing agency with a modest office has $10,000 in rent, $5,000 in software subscriptions, and $50,000 in staff salaries. These add up to $65,000 in fixed costs monthly, which make up most of their operating expenses. Knowing this total helps the agency set project pricing high enough to cover both fixed costs and variable expenses like contractor fees.

Tips to manage fixed costs effectively

Fixed costs may seem inflexible, but they don’t have to weigh down your business. By making small, smart adjustments, you can free up cash flow and protect profits without disrupting daily operations.

Here are simple ways to do it:

• Review contracts: Lease agreements, equipment rentals, and service contracts often have room for negotiation. When renewal dates are near, ask for better rates or terms.
• Optimize space: Office and retail space is often underused. Downsizing, subletting, or sharing facilities can significantly reduce overhead.
• Automate payments: Avoid late fees and protect your credit by setting up recurring payments. With QuickBooks, you can schedule and track these automatically to keep cash flow steady.

Leverage QuickBooks for seamless fixed cost management

Managing fixed costs is essential for your business’s financial health, as these recurring expenses set the baseline for your budget. QuickBooks streamlines tracking by automating expense categorization, providing real-time insights, and generating clear reports that show how fixed costs affect cash flow and profitability.

Learn how to keep track of business expenses with QuickBooks plans designed for your business.

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