In business, what is a fixed expense? This is a term used in business wherein you can determine an item’s fixed cost. In accounting and economics, fixed expenses, also called overhead or fixed outlays, are expenses which are not directly dependent upon the production or sales of the company’s products or services. They are recurring, for example the monthly payments of mortgages, rent or utilities being paid each month. For businesses, fixed expenses include inventory, office supplies, phone or data entry costs, travel, postage and utility bills.
However, not all fixed expenses are the same. Some are very specific, while others may be considered a combination of types of expenses. Some examples of the common fixed expenses in business are: leasehold improvements, real estate taxes, utility bills, capital expenditures, overhead costs, operating expenses such as supplies, advertising, furniture or equipment, goodwill items, capital assets, lawsuits or legal fees, and more. The list can go on.
There are two types of fixed expenses: fixed and variable expenses. A fixed expense is one that cannot be changed, unlike a variable expense which can be altered, adjusted, delayed or paid in a future period. Both types of expenses must be identified and accounted for at the beginning of every year in order to determine the company’s income and the taxes that need to be filed. Variable expenses, on the other hand, occur at the end of the fiscal year and can be accessed, adjusted or delayed. For many business owners, this is one of the biggest challenges in running a successful business.
How are fixed expenses determined? Fixed expenses are based on several factors, including the type of business, industry, geographic location and market share. While there are many theories on how these factors should be used to arrive at fixed expenses, the best practice is to use the most accurate method possible – that of accounting. There are many methods of accounting, but they are very different from one another.
The accounting of fixed expenses versus variable expenses is quite simple. The accounting professionals who prepare financial statements use what is called a functional analysis, which compares the income statement, balance sheet and cash flow statements of each company to determine what their average daily, annual or floating balance cost would be over a given period of time. This data is then entered into the company’s income statement. Variables that can be controlled include: the amount of the loan (whether through a loan-to-value ratio, interest rate or credit rating), the term of the loan (whether it is short term or long term), the monthly payments (whether they are annual or monthly), the monthly service fees (whether they are a percentage of the total amount of the loan), and whether the company has an emergency fund (whether it exists and what its purpose is).
Now, let’s compare fixed expenses with variable costs. The accounting principles behind this comparison are the same, but the ways in which the two are presented are very different. The main difference between these methods of costing are where the money comes from that is used for the purpose of paying expenses and for the purpose of generating income for the company. In this case, online loans are not classified as a fixed expense, as the money needed to pay the loaned amount is not “fixed” in any way. In fact, there is no limit on the amount of money that a company can loan.
How are fixed expenses classified as compared to variable expenses? Basically, the main difference is that while there may be a limit on the amount of money that can be borrowed and used to pay fixed expenses, there is no ceiling on the amount of money that can be spent on variable costs. Therefore, a company may spend all the money they borrow to pay salaries and yet still have some left to pay their variable costs. They can even take out loans against the equity in their business to fund the acquisition of new equipment and yet still have money left over to cover operating expenses and their personal liability insurance.
Now, you may be thinking that this is an unfair comparison – after all, it is fairly obvious that variable expenses have an unlimited number of possible uses and it is not fair to compare them with fixed expenses, which are clearly tied to a definite number and amount of money. Of course, you also have to consider the difference between direct and indirect expenses. A traditional business loan will include interest, as well as the principal amount, which will be capitalized during repayment. Variable costs are often variable, with each party defining what is directly associated with their cost. For example, the cost of maintaining and repairing the plant machinery, which is included in the fixed expenses account, will vary according to the condition of the machinery, the time needed to repair it, and the quality of the machinery.