What are fixed costs? Definition, examples and how to manage them

Published Thursday 23 July 2026

Table of contents

• What is a fixed cost?
• Examples of fixed costs
• Fixed costs vs variable costs
• Why fixed costs matter
• How to calculate fixed costs
• How to reduce and manage fixed costs
• Fixed, variable and semi-variable costs
• Track your fixed costs with Xero
• FAQs on fixed costs

Key takeaways

• A fixed cost stays the same each period no matter how much you sell, so it's one of the most predictable numbers in your business.
• Common fixed costs include rent, business rates, insurance, permanent salaries and loan repayments.
• Fixed costs sit at the heart of budgeting and break-even, because you have to cover them before you make a profit.
• You can manage fixed costs by reviewing premises, staffing, insurance, loans and energy use on a regular basis.

What is a fixed cost?

A fixed cost is a business expense that stays the same each period regardless of how much you produce or sell. It doesn't rise when sales are busy or fall when they're quiet.

Because the amount is steady, fixed costs are the easiest expenses to plan around. You'll usually pay them on a set schedule, such as monthly or annually, whether or not you take a single order that period.

Fixed costs are sometimes called overheads or indirect costs, since they keep the business running rather than going directly into one product. They can still change over time, for example when a lease is renewed, but they don't move with your day-to-day sales volume.

Examples of fixed costs

Fixed costs show up across almost every part of a business, from your premises to your finance agreements. The examples below are grouped so you can spot the ones that apply to you.

Premises and property costs are among the most common fixed costs for UK businesses:

• Rent on offices, shops, warehouses or workshops
• Business rates on commercial premises
• Building and contents insurance

People and finance costs are the other large group, especially as you grow:

• Permanent salaries that don't vary with output
• Loan repayments and the interest on them
• Equipment leases and hire purchase agreements

A few accounting and administrative items are fixed too, even though they're easy to overlook:

• Depreciation on assets you already own
• Software subscriptions billed at a flat rate
• Licences, memberships and professional fees

Fixed costs vs variable costs

The main difference is how each cost responds to your sales. Fixed costs stay the same whatever your output, while variable costs rise and fall with how much you produce or sell.

Fixed costs share a few clear traits that make them straightforward to plan for:

• Stay the same across a wide range of output
• Get paid on a regular, predictable schedule
• Continue even when sales stop for a period

Variable costs behave in the opposite way and track your activity closely:

• Rise as you make or sell more
• Fall to near zero when you stop trading
• Include raw materials, stock, packaging and card fees

Most businesses carry both types, and knowing the split helps you understand how profit changes as sales move. You can read more about individual costs in the Xero expense glossary entry.

Why fixed costs matter

Fixed costs matter because you have to cover them before you make any profit, so they shape your budgeting and pricing. They give you a predictable base to plan around, and they set the sales target you need to break even.

Since the figures stay steady from month to month, fixed costs are simple to forecast and build into a budget. The higher your fixed costs, the more you need to sell before the business turns a profit.

Fixed costs also feed directly into your break-even point, the level of sales where total revenue covers total costs. You can work through this in more detail with the Xero guide to the break-even point formula.

Because fixed costs stay put even when trade slows, they matter most when margins tighten. According to Xero Small Business Insights, UK small business owners spent early 2026 responding to squeezed margins by delaying premises and equipment upgrades and favouring casual hires over permanent staff, targeting exactly the commitments that drive fixed costs.

How to calculate fixed costs

To calculate your total fixed costs, you add up every expense that stays the same regardless of output over a set period. The steps below walk through the fixed cost formula using a monthly example.

1. List every expense that doesn't change with sales, such as rent, business rates, permanent salaries, insurance and loan repayments.
2. Add those amounts together for the same period, for example one month, to get your total fixed costs.
3. Divide total fixed costs by the number of units you produce in that period to find your fixed cost per unit.

As an example, if your rent is £2,000, salaries are £5,000 and insurance is £500 in a month, your total fixed costs are £7,500. Produce 1,500 units and your fixed cost per unit is £5.

How to reduce and manage fixed costs

You can't remove fixed costs, but you can keep them under control with a regular review. The steps below focus on the areas where small businesses tend to find the biggest savings.

1. Review your premises and rent, and consider whether smaller, shared or hybrid space would suit your team.
2. Check your staffing mix, balancing permanent salaries against flexible or casual hours where the work allows.
3. Shop around on insurance each renewal so you keep the cover you need at a competitive price.
4. Revisit loans and finance agreements to see whether refinancing could lower your repayments.
5. Cut energy waste with efficient equipment and simple habits that trim your standing bills.

Track these costs in one place so you can spot changes early and act before they eat into your margins.

Fixed, variable and semi-variable costs

Not every cost fits neatly into fixed or variable, so it helps to know a third category. Semi-variable costs and sunk costs round out the picture.

A semi-variable cost, sometimes called a mixed cost, has a fixed base plus a variable part that moves with usage. A phone plan with a monthly line rental and per-minute charges is a classic example.

A sunk cost is money you've already spent and can't recover, such as a non-refundable deposit. Some fixed costs become sunk costs once paid, but the two aren't the same, since a future rent payment is still avoidable if you end the lease.

Track your fixed costs with Xero

Keeping your fixed costs organised makes budgeting and break-even planning far simpler. Xero brings your bills, expenses and reports together in one place to help you see where your money goes.

You can track your fixed costs and run clear reports in one place. When you're ready to start, you can get one month free.

FAQs on fixed costs

Here are answers to some frequently asked questions about fixed costs that go beyond the sections above.

Where are fixed costs recorded?

Fixed costs appear as expenses on your income statement, also called the profit and loss statement. Some, such as prepaid insurance, can briefly sit on the balance sheet before they're used up.

How are fixed costs treated in accounting?

They're recorded in the period they relate to, so an annual cost is often spread across the months it covers. This matching keeps your reporting accurate and comparable from one period to the next.

Are all fixed costs sunk costs?

No, a fixed cost only becomes a sunk cost once you've paid it and can't get it back. Future fixed costs are still avoidable, for example by ending a lease or cancelling a subscription.

Can fixed costs ever change?

Yes, they can change when a contract is renewed, a rent review happens or you renegotiate a loan. They just don't move with your day-to-day sales volume in the way variable costs do.