How to Calculate Your Business’s Total Fixed Cost

Fixed costs represent business expenses that remain constant regardless of the volume of goods or services produced within a specific period. These expenses are incurred even if a business produces nothing at all. This article guides you through recognizing and summing these financial commitments for your business.

Understanding Fixed Costs

Fixed costs are expenses that do not fluctuate with changes in production levels or sales volume over a short to medium term. These costs are typically time-based, meaning they are incurred regularly, such as monthly or annually. They represent the baseline operational expenses required to keep a business running, irrespective of its output. Businesses incur these costs whether they are operating at full capacity or experiencing a slowdown.

A common example of a fixed cost is rent for office space or a manufacturing facility. This payment remains the same each month, regardless of how many products are manufactured or services provided. Insurance premiums, such as general liability or property insurance, also fall into this category, as they are typically paid on a fixed schedule. Similarly, the salaries of administrative staff, like human resources personnel or accounting department employees, are generally fixed costs because their compensation does not directly depend on production output.

Depreciation on equipment and machinery is another significant fixed cost. Businesses recognize depreciation as the systematic allocation of an asset’s cost over its useful life. This accounting expense reduces the asset’s value on the balance sheet and is recorded regularly, independent of daily production. Interest payments on long-term loans, such as those for purchasing property or large equipment, also represent fixed obligations. These payments are due on a predetermined schedule, unaffected by sales performance.

Property taxes levied by local jurisdictions on real estate owned by the business are also fixed expenses. These taxes are assessed periodically, often annually, based on the property’s assessed value, not on the business’s operational activity. Certain utility costs, like a basic internet service fee or a fixed monthly telephone line charge, can also be considered fixed if they do not vary with usage.

Identifying Fixed Costs in Your Business

Locating fixed costs within your financial records requires a systematic review of various expense categories. Business owners can typically find these expenses by examining their general ledger accounts, which provide a detailed breakdown of all financial transactions. Reviewing vendor invoices and contractual agreements is also an effective way to identify recurring, consistent charges. Payroll records will clearly show the salaries of employees whose compensation is not tied to production volume, such as office managers or executive staff.

To differentiate fixed costs from variable costs, consider whether an expense changes in direct proportion to changes in production or sales activity. If the expense remains the same whether your business produces 100 units or 1,000 units, it is likely a fixed cost. For instance, the monthly payment for a leased vehicle remains constant, unlike the cost of raw materials, which increases with higher production. Analyzing historical expense data can also reveal patterns, where certain costs consistently appear as the same amount over multiple periods.

Ask yourself if the expense would still be incurred if your business temporarily ceased production but maintained its infrastructure. An affirmative answer suggests the expense is fixed. For example, even if a manufacturing plant temporarily shuts down, the rent for the facility, insurance premiums, and salaries for essential administrative personnel would still be due.

Consider also the timeframe; some costs may appear fixed in the short term but become variable over a longer period. However, for typical operational analysis, focus on expenses that are fixed within your current operational capacity and relevant production range. This includes expenses like annual software licenses, which are paid upfront regardless of how much the software is used.

Calculating Total Fixed Costs

Once all individual fixed costs have been thoroughly identified and categorized, calculating the total fixed cost is a straightforward summation. This step involves adding up all the distinct fixed expenses identified from your financial records for a specific period, such as a month or a quarter.

For example, if a business has monthly rent of $2,500, administrative salaries totaling $7,000, insurance premiums of $300, and loan interest payments of $800, these amounts are simply added together. The calculation would be $2,500 (Rent) + $7,000 (Salaries) + $300 (Insurance) + $800 (Loan Interest), resulting in a total fixed cost of $10,600 for that month.