Fixed cost
Learn what a fixed cost is, with examples and how it differs from variable costs for your small business.
Published Thursday 6 August 2026
Table of contents
Key takeaways
- A fixed cost is a business expense that stays the same regardless of how much you produce or sell, such as rent, insurance or permanent staff salaries.
- Understanding the difference between fixed and variable costs helps you set prices, plan budgets and calculate your break-even point more accurately.
- To calculate total fixed costs, add up all expenses that remain constant each month or use the formula: total costs minus total variable costs.
- Keeping fixed costs in check gives your business more flexibility and protects profit margins when sales slow down.
What is a fixed cost?
A fixed cost is a business expense that remains constant over a set period, regardless of how much you produce or sell. You pay the same amount whether your sales are high, low or zero.
Fixed costs are also called indirect costs or overhead costs because they support your operations as a whole rather than any single product or service. Common examples include office rent, business insurance and permanent employee salaries.
It's worth noting that "fixed" means stable within a given timeframe, not permanent forever. Your rent may stay the same month to month, but it can increase when you renew your lease or move to a larger space.
Examples of fixed costs
Most businesses carry a similar set of fixed costs. Recognising these expenses helps you plan your budget and understand what you owe each month before you earn any revenue.
- Rent or lease payments for office, retail or warehouse space
- Business insurance premiums
- Salaries for permanent employees
- Equipment leases or hire-purchase agreements
- Depreciation on owned equipment and vehicles
- Loan interest payments
- Government rates or property tax
Fixed costs vs variable costs
Business costs fall into two main categories. Understanding both helps you price your products, manage cash flow and make better decisions when sales fluctuate.
Fixed costs stay the same no matter how much you produce. Variable costs rise and fall in direct proportion to your output or sales volume. If you make more products or serve more customers, your variable costs increase; if activity slows, they decrease.
Common variable costs include:
- Raw materials or inventory
- Packaging and shipping
- Sales commissions
- Credit card processing fees
- Hourly wages tied to production
A cost is usually one or the other, though some expenses have elements of both, as explained in the next section.
Semi-variable costs
Some expenses don't fit neatly into the fixed or variable category. Semi-variable costs (also called mixed costs) include a base component that stays the same plus a usage component that changes with activity.
A mobile phone plan illustrates this well: you pay a flat monthly fee for the line, plus extra charges if you exceed your data or call allowance. Utilities often work the same way, with a standing charge plus a per-unit rate for electricity or water consumed.
When budgeting, it helps to separate the fixed and variable portions of semi-variable costs. That way you can forecast your minimum monthly outgoings and estimate how higher production will affect your total spend.
How to calculate your total fixed costs
Knowing your total fixed costs gives you a baseline for budgeting and pricing. If you're just starting out, these figures also feed into your startup cost planning. You can calculate them using either of these approaches.
1. Add up each fixed expense
List every cost that remains constant each month, then sum them. This is the most straightforward method if you have a clear breakdown of your expenses.
2. Subtract variable costs from total costs
If you already know your total monthly costs and your variable costs, use this formula:
Total fixed costs = Total costs – Total variable costs
3. Review a worked example
A small consultancy has monthly rent of HK$15,000, insurance of HK$1,200, software subscriptions of HK$800 and a permanent admin salary of HK$18,000. Total variable costs (contractor fees tied to projects) are HK$12,000, and total costs for the month are HK$47,000.
Using the first method: HK$15,000 + HK$1,200 + HK$800 + HK$18,000 = HK$35,000 in fixed costs.
Using the second method: HK$47,000 – HK$12,000 = HK$35,000 in fixed costs.
Why fixed costs matter for your business
Fixed costs influence several key aspects of running your business. Understanding them helps you plan with more confidence.
Because fixed costs stay the same each month, you can predict your minimum outgoings for budgeting and cash flow. This makes forecasting easier, especially in slower periods when revenue is less certain.
Your break-even point depends on covering your fixed costs plus the variable cost of each unit you sell. Lower fixed costs mean you need fewer sales to break even, and a healthy margin of safety shows how far sales can fall before you make a loss.
Fixed costs also shape your pricing. When setting prices, you need to cover both fixed and variable costs and leave room for profit, so knowing your fixed costs helps you calculate the minimum price that keeps your business sustainable.
They affect your flexibility too. High fixed costs commit you to large payments even when sales drop, so keeping fixed costs proportionate to your revenue protects your margins and gives you more room to adapt during quieter periods.
Stay on top of fixed costs with Xero
Tracking your fixed and variable costs in one place makes budgeting and forecasting simpler. Xero brings your expenses, bank transactions and reports together so you can see exactly where your money goes each month. To get started, get one month free.
FAQs on fixed costs
Here are answers to common questions about fixed costs for small businesses.
Is rent a fixed cost?
Yes. Rent is a fixed cost because the amount due each month stays the same regardless of how much you produce or sell. It only changes when you renegotiate the lease or move premises.
Are salaries fixed or variable costs?
Salaries for permanent employees are fixed costs because they don't change with output. Hourly wages or contractor fees tied to production volume are variable costs.
What is the difference between fixed and variable costs?
Fixed costs remain constant no matter how much you produce, while variable costs increase or decrease with your output or sales. Rent and insurance are fixed; raw materials and shipping are variable.
How do you calculate total fixed costs?
Add up every expense that stays the same each month, or subtract your total variable costs from your total costs. Both methods should give you the same figure.
Related terms
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Disclaimer
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.