What is a fixed cost?

Published Thursday 23 July 2026

Table of contents

• What is a fixed cost?
• Examples of fixed costs
• Fixed costs vs. variable costs
• How to calculate fixed costs
• Why fixed costs matter for your business
• How to manage fixed costs
• Track your fixed costs with Xero
• FAQs on fixed costs

Key takeaways

• Fixed costs are expenses that stay the same regardless of how much your business produces or sells, such as rent, insurance, and salaries.
• Knowing your total fixed costs helps you set prices, calculate your break-even point, and build more accurate budgets.
• Fixed costs differ from variable costs, which rise and fall with your sales volume; most businesses carry a mix of both.
• Regularly reviewing and negotiating your fixed costs can free up cash and strengthen your financial position, especially during periods of slower revenue growth.

What is a fixed cost?

Understanding your fixed costs is one of the first steps toward managing your business finances with confidence.

A fixed cost is a business expense that remains the same over a set period, regardless of how much you produce or sell. Whether you have a busy month or a slow one, these costs don't change. Rent is a classic example: you pay the same amount each month no matter how many customers walk through the door.

Fixed costs are sometimes called overhead costs or indirect costs. They're the baseline expenses you need to cover just to keep your business running. Because they're predictable, they make it easier to plan your budget and forecast spending.

"Fixed" doesn't mean permanent. A landlord might raise your rent at the end of a lease, or an insurance premium might increase at renewal. The key distinction is that fixed costs don't fluctuate with your day-to-day sales activity the way variable costs do.

Examples of fixed costs

Most businesses carry several fixed costs at once. Here are some of the most common ones you're likely to encounter.

• Rent or lease payments: the monthly cost of your office, retail space, or warehouse
• Insurance premiums: business liability, property, and workers' compensation coverage you pay on a regular schedule
• Salaries: consistent pay for full-time employees, regardless of how many hours they work or how much revenue comes in
• Loan repayments: fixed monthly payments on business loans, equipment financing, or lines of credit
• Software subscriptions: monthly or annual fees for tools like accounting software, project management platforms, and CRM systems
• Depreciation: the gradual reduction in value of assets like vehicles, machinery, or computers, recorded as an expense over time
• Property taxes: taxes assessed on business-owned real estate, typically billed annually or semi-annually

Some of these costs might seem small on their own. But when you add them all up, they can represent a significant share of your total expenses.

Fixed costs vs. variable costs

To get a complete picture of your business expenses, it helps to understand how fixed costs compare to variable costs.

Fixed costs stay the same no matter how much you sell. Variable costs, on the other hand, rise and fall in direct proportion to your sales volume or production output. Raw materials, shipping fees, and sales commissions are all examples of variable costs.

Here's a simple way to tell the difference: if you sold nothing for an entire month, your fixed costs would still be due. Your variable costs, however, would drop to zero (or close to it).

Many businesses also have semi-variable costs, sometimes called mixed costs. These have a fixed base plus a variable component. A phone plan with a flat monthly fee and per-minute overage charges is a good example. Utility bills often work this way too: you pay a base rate, but usage drives the final amount.

Knowing which of your expenses are fixed, variable, or semi-variable helps you predict how your total costs will change as revenue grows or contracts.

How to calculate fixed costs

Calculating your fixed costs is straightforward once you know what to look for.

Total fixed costs

To find your total fixed costs, add up all the expenses that don't change with your sales volume. You can pull these figures from your profit and loss statement or accounting software.

Total fixed costs = rent + insurance + salaries + loan payments + subscriptions + other fixed expenses

For example, if your monthly rent is $2,000, insurance is $500, salaries total $8,000, and software subscriptions come to $300, your total monthly fixed costs are $10,800.

Fixed cost per unit

If you want to know how much of your fixed costs each product or service needs to cover, divide your total fixed costs by the number of units you produce or sell.

Fixed cost per unit = total fixed costs / number of units produced

Using the example above, if you produce 1,000 units in a month, your fixed cost per unit is $10.80. This is useful for setting prices, because every unit you sell needs to cover its share of fixed costs plus variable costs before it contributes to your profit margin.

Why fixed costs matter for your business

Fixed costs play a central role in your financial planning, pricing, and long-term stability.

Budgeting and predictability

Because fixed costs don't change with sales volume, they're the easiest part of your budget to plan for. You know exactly what you owe each month, which makes cash flow forecasting more reliable.

According to Xero Small Business Insights, US small business sales growth averaged just 2.4% year-over-year in 2025, roughly half the long-term average of 5.5%. In periods of slower revenue growth like this, having a firm handle on predictable fixed costs becomes even more important for staying financially resilient.

Break-even analysis

Your fixed costs directly determine your break-even point: the revenue you need to cover all your expenses. The higher your fixed costs, the more sales your business needs before it starts generating profit.

In a Xero survey of US business owners, 69% of businesses were able to break even within their first year. Keeping startup and fixed costs low is one factor that helps new businesses reach that milestone faster.

Pricing decisions

When you set prices, you need to account for both fixed and variable costs. If your prices don't cover your fixed cost per unit plus your variable cost per unit, your contribution margin turns negative and you'll lose money on every sale. Knowing your exact fixed costs helps you set prices that protect your margins.

How to manage fixed costs

While you can't eliminate fixed costs entirely, there are practical ways to keep them under control.

Review your expenses regularly

Audit your fixed costs every quarter. A good way to start is to track business expenses consistently so you can spot patterns. Look for subscriptions you no longer use, services you could downgrade, or contracts up for renewal. Even small savings on individual line items add up over a year.

Negotiate with vendors

Landlords, insurance providers, and software vendors are often open to negotiation, especially if you're a long-term customer or willing to sign a longer contract. Ask for discounts, bundled pricing, or loyalty rates.

Consolidate tools and services

If you're paying for multiple tools that overlap in functionality, consider switching to a single platform that handles more of your needs. Using one accounting platform that covers invoicing, expense tracking, and reporting can replace several separate subscriptions.

Consider flexible arrangements

Where possible, look for ways to convert fixed costs into variable ones. A co-working space instead of a long-term office lease, or a pay-as-you-go phone plan instead of a fixed contract, gives you more flexibility when revenue fluctuates.

Track your fixed costs with Xero

Staying on top of your fixed costs is easier when all your financial data is in one place. Xero's accounting software lets you track every expense, set up recurring transactions, and run reports that show where your money goes each month.

With real-time visibility into your finances, you can spot cost increases early, compare actual spending to your budget, and make informed decisions about where to cut back or invest. Get one month free.

FAQs on fixed costs

Here are some frequently asked questions about fixed costs.

Can a fixed cost become a variable cost?

Yes, in some cases. For example, if you move from a salaried employee to a freelancer paid per project, that labor cost shifts from fixed to variable. Renegotiating contracts to usage-based pricing is another way to convert fixed costs.

What are stepped fixed costs?

Stepped fixed costs stay constant within a certain range of activity but jump to a higher level once you pass a threshold. For example, you might need to rent additional warehouse space once your inventory exceeds a certain volume.

How do fixed costs affect profit margins?

When your revenue increases but your fixed costs stay the same, your profit margin improves because each additional sale contributes more to profit. Conversely, if revenue drops, fixed costs take up a larger share of your income and margins shrink.

What's the difference between direct and indirect costs?

Direct costs can be traced to a specific product or service, like raw materials. Indirect costs, like rent or administrative salaries, support the business as a whole. Most fixed costs are indirect, but not all indirect costs are fixed.