All You Need to Know About Fixed Costs

In this article, we will discuss fixed costs, how they affect your business, and why managing them is important. We will also explore how time tracking can aid these efforts and how to find the best solution.

Every business incurs expenses. But there’s a difference between those that can be forecasted, ones that hit unexpectedly, and the ones we always take into account because they are constant. The latest is today’s topic, also known as fixed costs. It is a simple concept everyone is familiar with, for it’s present in both business and day-to-day lives. For this exact reason, however, it’s often overlooked and not given much thought, which can bear grave consequences in the long run. 

Honouring fixed costs is a non-negotiable agreement, elevating it to the top of a priority list when planning a budget and KPIs. Such inevitability, on the other hand, often lulls people into treating them as something self-explanatory and natural, which leads to fixed costs being forgotten altogether. 

What Are Fixed Costs?

Fixed costs are recurring expenses of the same value that occur at an agreed-upon frequency. The simplest example is rent. It’s a fee that has to be paid every month on a specific day for the duration of the contract. Other samples of fixed costs are subscriptions, taxes and salaries. While they change over time, it’s foreseen and rare. 

When it comes to fixed costs, there is often a contract in place, legally binding you to honour them. Failure to do so may result in financial penalties, property re-possession and even persecution. This is why it’s essential to keep them at the front of your mind when making financial decisions and forecasts.

The Impact of Fixed Costs on Business Operations

How you manage fixed costs has a significant impact on your overall business success, but many fail to notice this. So, let’s talk about it in depth. 

Break-even Point and Profitability

Fixed costs are a crucial denominator when it comes to both forecasting and calculating your business’ profitability. While every business incurs expenses as part of its operational flow, fixed costs specifically add clarity when it comes to managing expectations. It’s already in the name - the said costs aren’t to change unexpectedly and are fixed in place, therefore always part of the equation. This makes them a starting spot when setting up revenue goals to both reach and surpass the break-even point. Of course, like everything, they are subjected to changes as time passes, but you will have ample time to prepare for that. Not to mention, the said changes are usually rare and far in between. 

However, the importance of fixed costs in this context sparks a discussion of what should be considered fixed costs. Naturally, a fixed cost is a recurring expense that is set in place for an extended period of time. Different companies will see things differently as such. For example, most agree that renting office premises or cleaning services is a fixed cost as these payments are consistent in both amount and frequency. But then, are employee salaries or software subscriptions considered as such? This is for you to decide - will they impact your break-even point? The answer should clear up the confusion. 

High Fixed Costs During Economic Downturns

While fixed costs, due to their constancy, can provide a sense of certainty, they can also be a major inconvenience during economic downturns. Many companies prioritise having them on the higher end to honour them fully in the shortest time possible, and while this may sound like a logical solution if the company is doing well, it is a slippery slope when it comes to unpredictable future risks.

In today's unstable economic environment, yesterday’s booming business may struggle to make ends meet tomorrow. This is when high fixed costs will not just prevent further development but may even send you into debt. Depending on how you navigate through economic downturns by allocating your resources, fixed costs may become the nail in the coffin when it comes to merely keeping your company afloat. It is complicated to prioritise them in the light of other operations, making it easy to take them out of the equation altogether. And when that happens, you’re bound to get in trouble. So, is there a solution?

The Role of Time Tracking in Managing Fixed Costs

Managing time goes hand in hand with managing fixed costs. In fact, time tracking is necessary to elevate it as it adds clarity, leading to better-informed business decisions. Instead of sustaining your business, it helps in guiding it towards profitability. 

Efficient Resource Allocation with Time Tracking

Resource allocation is generally an essential component of ensuring your business's profitability and efficiency. Fixed costs are at the core of it as they are a contributing factor in making decisions regarding priorities, staff availability and deadlines. However, there are better ways to go forward than basing your entire approach to resource management on the pre-set expenses, as it may help sustain maintenance rather than drive active progress. Adding time tracking to the equation will turn the tables. 

Understanding where and how your team spends time and how long it takes to get over certain tasks is a dimension that should be compared to fixed costs in order to work out the best arrangement. The data it brings allows you to estimate the predicted ratio of time and money per task, putting it against the fixed costs that are less fluctuant to determine the most cost and time-efficient setup. In other words, time tracking gives you additional accuracy, which enables smarter decision-making. 

Tools for Effective Time Tracking

But here’s a catch. Tracking time isn’t as straightforward as it once was, not with today’s demands. The modern world is so fast-paced that no human can compete, and this is the primary reason behind the technological boom of recent years. Time tracking needs to be digitised for it to be efficient and help you build a strategy around your fixed costs. The market has a wide range of solutions to offer. 

While you might seek out sophisticated tools that promise an array of features, simplicity is key. As long as the tool is customisable to your needs, easy to use and blends into your existing setup, that’s all you need. With these basic requirements covered, not only will you be able to elevate your business performance, but you will also save money as lesser functionality reflects in lower costs. Sure, if you have specific features you want to add to your operations, don’t neglect them. But if all you need is time tracking, we recommend keeping it simple.

Streamlining Fixed Cost Management

Despite being taken for granted, fixed cost management, when done right, requires a lot of effort and time. Understandably, this is one thing no one has a surplus of. But there are ways to streamline the process and take the burden off your shoulders. 

Benefits of Automation

Stakes are high when it comes to fixed costs, mainly because they are non-negotiable. Ensuring they are honoured is high on the priority list, but it’s also important not to let these maintenance tasks overshadow progress-driving activities. Automated systems can be a great way to find the middle ground. They simplify processes like invoicing, payroll, and expense tracking by taking over either some steps within or the entirety of the operations.

That leads to an overall improved efficiency and a lower risk of errors. The use of several solutions linked through integrations can simultaneously collect and apply data, only leaving you the task of analysing it. With the correct setup, you can make sure the fixed costs are always tended to without your direct involvement and your further business development is paved in accordance with them, without the fear of self-jeopardy. While finding the right combination can be time-consuming, it is a long-term investment that will save you a lot of trouble.

Summary

Your overall financial success heavily depends on how well you manage your fixed costs. Instead of pushing them to the back of your mind, keep them at the forefront of the decisions you make. This way, they won’t harm you in times of economic downturns and will help you profit instead of simply breaking even during periods of stability. This mindset applies to both business and everyday life. While we treat fixed costs as part of the routine, they must not be forgotten or neglected. 

Time tracking is a great asset to have when turning fixed cost management from maintenance to profitability. It enables you an extra layer of visibility when allocating your resources, therefore leading to better decisions and more accurate forecasts. With many solutions available on the market, you will never run out of options. However, we recommend sticking to the basics to preserve costs and narrow down the list of potential tools. Automating processes using digital tools can also aid your efforts, alongside improving your efficiency. 

Don’t fret about managing your fixed costs too much. Let Timesheet Portal to the work for you.