How to budget between fixed and variable business expenses
When it comes to figuring out how to budget, you’ll no doubt have many expenses. Some will be big and others small, but you’ll need to categorize them into different types of business expenses. That way you can more easily make financial decisions for the business based on how your money is being spent, not just the things you’re spending money on.
Fixed expenses are amounts that don’t change from period to period. Typically monthly or annually paid, a fixed expense is both comforting and your worst enemy in business.
When you have fixed expenses, it provides some comfort because you know what the number will be for each period. You’re done after you earn that amount in revenue. It can be especially comforting for businesses that have been around for a while and know their business model well.
But most fixed expenses also don’t stop when business goes down. So if you’re not doing as well as you’d hoped, you still have that fixed expense to pay each period. That can be a source of stress and anxiety for any business owner, so be sure to keep fixed expenses as low as possible.
The only kind of fixed expense that you would want to increase is any expense directly correlated to revenue – with positive unit economics. For example, if you had to pay $100 in fixed manufacturing costs to produce your product, but you already have recurring orders for more than $100, the fixed expense is worth it.