4 – Ongoing Costs
The Fixed and Variable Costs of Doing Business
Your ongoing needs include the money, people, things, technology, and activities required day-to-day, month-to-month, to keep your business running. Because your costs make or break your business, it’s important to identify which are essential (you’ve got to have them) and which are optional (it’d be nice to have them). Initially, focus on the things you absolutely have to have to make your business work.
If something is expensive and essential, be creative. Can you accomplish the same thing for less? For example, leasing equipment instead of purchasing it may cut down on your one-time costs.
Mission-critical costs should not be reduced, however. For example, Cynthia could buy inferior ingredients to lower her costs, but in doing so, she would sacrifice taste, undermining her brand and ultimately the success of her business.
ASK YOURSELF:
- How much time each week will I need to maintain the business?
- What activities will I need to do each month?
- Who needs to be involved?
- Will I pay staff? (or exchange equity)
- What supplies will I continually need?
- How much will I need each month for rent, utilities, and marketing?
The costs you have to keep paying, often every month, in order to stay in business are your ongoing costs. Ongoing costs come in two varieties: “fixed” and “variable.”
Fixed Costs (Costs that Stay the Same)
Fixed costs have to be paid even if no sales are made. For example, Cynthia pays for her cell phone and permits regardless of how many events she caters. Other fixed costs include rent, utilities, insurance and salaries.
Variable Costs (Costs that Change)
While fixed costs stay the same each month regardless of sales, variable costs change according to how much you sell. Your variable costs are the amount of money it takes to produce one unit or typical sale. In Cynthia’s case, each event has the cost of ingredients, labor, and payment processing. Every time she makes a sale she incurs the variable costs of catering an event.
Variable costs help you determine your “gross profit.” Gross profit is the amount of money you make on on each typical sale after subtracting your variable costs from your price. “Gross profit” is not the same as “profit,” which we’ll examine later.
Labor Costs (Fixed or Variable)
Labor costs may be either fixed or variable, depending on what the worker does. Some must be paid whether or not you make sales or produce goods. If you pay employees by the job, on commission, or by the hour, then the labor costs are variable costs, tied to producing the unit of sale.
Gross profit = Price (Revenue) – Variable costs
If you own a service business, pay yourself a salary, and have no hourly employees, it is possible to have no variable costs.
Don’t Forget Yourself!
Look back at your ongoing costs. Did you pay yourself? Unless you get paid, your business isn’t sustainable. Even if you can’t pay yourself at the start, it needs to be a goal. Include it in your costs.
Complete the assignment before moving on. (You can either type directly on the fillable PDF and download it to your device or you can print the assignment, complete it by hand, scan or take a photo of it and then upload it below.)