Fixed costs

Definition

Fixed costs are the costs a business pays regardless of how much it produces or sells — rent, salaries, insurance, software subscriptions. They contrast with variable costs, which move with output.

In plain terms

These are the bills that arrive whether you have a busy month or a dead one. They form the base you must cover before any profit is possible.

Why it matters for your company

High fixed costs raise your break-even point and operating risk — a quiet month hurts more. Understanding your fixed-cost base is central to cash-flow planning and knowing how resilient the business is.

In practice

Picture a small UK limited company running an office or a unit: rent, core salaries, insurance and standing software subscriptions land whether the phones are ringing or silent. Those obligations do not pause for a slow month, which is exactly why directors treat the fixed-cost line as the first thing to plan around, not an afterthought once sales are known.

In a quiet trading period, a director typically starts by separating what is truly fixed from what could be renegotiated or deferred — a lease review, a software tier downgrade, a pause on a discretionary retainer. The costs that remain genuinely fixed become the baseline the business must clear before variable costs and any surplus are even in the picture.

How lenders read it

When a lender looks at a company's cost base, a heavy proportion of fixed costs relative to variable costs signals less flexibility to absorb a downturn — the business cannot simply scale spending down alongside a fall in revenue. Lenders reading management accounts will often ask how the fixed base was built up and whether it reflects committed, unavoidable obligations or costs that could, in practice, be trimmed.

A company that can clearly explain its fixed-cost base, and show it has been reviewed rather than left to drift upward, tends to present as better understood by its own management — a factor that sits alongside, not instead of, the wider affordability picture a lender considers.