Strategy Session

What Are Fixed Expenses?

fixed cost fixed expense revenue Jul 14, 2022

One question that comes up in our business quite often is what are our fixed expenses?

Fixed expenses are those costs inside our business that do not change, they fluctuate slightly, but they're not completely dependent on revenue to change from month to month. So, a really good example of a fixed cost would be a membership subscription to maybe a CRM platform to rent expenses, insurance, items that stay consistent from month to month and don't change when our revenue fluctuates.

Why is it important to understand what our fixed costs are?

Because when we think of a business and we think of cost cutting, what we're really thinking of is what our fixed expenses are and eliminating those that aren't driving higher financial performance in our business. I'll give you an example of myself in my business. One item that we have is we have two CRM platforms we use Infusionsoft and Active Campaign, and we do not need to. We have two fixed costs that happen every single month as a subscription cost. And if I was really analyzing my fixed cost to see what items were in here that are not essential, I should be really eliminating one of those expenses. 

If you're looking to get lean and mean and really drive as much profit as you can and eliminate non-essential expenses, it's looking at your fixed expenses and seeing what's not necessary for you to continue to deliver your business on a day to day occurrence.

So the first thing we need to understand is what are fixed expenses?

How can we predict them?

And how do we make sure we continue to monitor them to see what expenses we can cut out of the business that aren't essential going forward. That is certainly one of the key areas to increasing our financial performance in a very simple way, eliminating non-essential fixed expenses.

Now, what this means is do not eliminate those expenses that are generating future revenue. One example could be a reoccurring marketing expense. We don't want to go and cut out marketing costs just because it's a fixed expense. It's reoccurring when it might have a future positive impact. We just want to look at our fixed expenses and eliminate any of those costs that aren't necessary in our business and aren't having a positive impact.

That is why understanding our fixed expenses is super important and really outlining those would be the first step in getting a really good understanding of what's happening in your business and what action steps you can take to eliminate non-essential costs going forward.

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