What are fixed costs in a small business?

Fixed costs are expenses that remain constant regardless of the level of production or sales that a small business has. This means that, unlike variable costs that fluctuate based on output—such as raw materials or labor directly tied to production—fixed costs must be paid regardless of business activity.

Examples of fixed costs include rent or lease payments, salaries of permanent staff, insurance, and equipment leases. These expenses are essential for maintaining the basic operations of the business, and they do not change with the volume of goods or services produced.

Understanding fixed costs is crucial for small business owners because it helps in financial planning, budgeting, and determining the break-even point. It allows them to analyze how much revenue they need to generate at a minimum level to cover their essential expenses consistently.