If you still don't know how to differentiate them, keep reading and learn how this separation is fundamental in the financial control of your business.
Know the fixed costs
Fixed costs are those that, as the name implies, remain fixed regardless of production volume . Thus, as much as the pace of production and sales fluctuates, these values are more static.
Fixed costs include expenses such as rent, security services, cleaning, telephone plans, equipment maintenance, etc.
Of course, there is a margin for variation in these costs , such as, for example, a rent adjustment. However, the variation in these expenses is minimal or only occurs from time to time.
Know variable costs
Unlike fixed costs, variable costs are those that follow the company's production pace, changing over time . The variable cost is one that will change according to the volume of sales or the provision of services.
When your company spends on raw material to produce, the costs with that raw material will go up or down according to the demand for the product.
In addition to spending on raw materials, spending on electricity and water also fits into these expenses, if their production is related to the consumption of water and electricity.
Labor costs can be fixed once you know wages. However, these costs can also be categorized as variables, if you have to spend on overtime, or if you need more or less employees to carry out the activities.
Thus, the categorization between fixed and variable will depend on the nature and functioning of your business . What matters is knowing which costs tend to be repeated and which ones fluctuate.
Why differentiate between fixed and variable costs?
One of the reasons for separating the types of costs is to help with the pricing process for your product or service . Thus, the entrepreneur will be able to identify how much is spent to produce each unit of his product or the value to provide a certain service.
The greater the production, the smaller the impact of fixed costs on each product or service and the greater the possibility of lowering the final price for the consumer.
In addition, separating costs is the best way to keep expenses under control, checking how your cash flow is going and seeing where the money is going. This is the first step in thinking about cost reduction strategies and increasing revenue.
Another important point in separating costs is the company's preparation for important moments in the sale. At certain times, sales go up and therefore variable costs too. During this period, it is important to have more capital available to invest in production or provision of services.
Know how to manage costs
Now that you know how to differentiate the types of costs and their importance, it is important to know how to manage them. Ideally, you should start by making a disciplined record of all expenses . If you don't already do this, get past bills in order to establish an expense history.
Record all financial outflows, categorize and account for fixed and variable costs . You will be able to visualize which are the costs that are always maintained and those that change in your business, evaluating whether your company is composed of more fixed or variable costs.
If you are a company where fixed costs predominate, the pace of sales can increase your profitability in times of high business. You need to set a goal that will cover all costs and, when you exceed that amount, that will be synonymous with profit margin growth.
The problem is that when sales drop, fixed costs are not amortized and the manager loses out. In these scenarios, it is important to reassess costs and think about cost reduction strategies .
When the company has more variable costs, as in most cases of service provision, it is more difficult to carry out a policy of discounts or reduction of the final price. This happens because the manager must seek to guarantee profit in each product or service sold. The pricing process must be very careful in order to guarantee profitability.