Fixed versus variable cost is one of the most fundamental concepts that will help you get a grip on financial management and to make wise financial decisions. The basic concept is that for every sale, there is a certain percentage of that sale that you will incur as costs and they are called variable costs. On the contrary, some costs are incurred irrelevant to a sale. These are called fixed costs.

Typical variable costs includes;

  • Food and drink costs
  • Costs incurred for hourly worker such as servers and bus boys
  • Costs for supplies that are consumed for each sale

Typical fixed costs includes;

  • Rent Advertising (in most cases)
  • Fixed salaries

Some costs are not black and white. Nonetheless, the margin that you receive (Sales minus variable costs: contribution margin) needs to cover fixed costs in order for the business to make a profit. The lower your fixed costs are, the lower the risk of going broke in a short time. What is your variable cost? How can you grow the contribution profit so that it will cover fixed costs? Getting a good grip on this will also help with a quick calculation on deciding on a new equipment investment.