## What is Fixed Cost? Why Do Entrepreneurs Need to Understand It

Suppose you open a coffee shop. From day one, you have to pay rent for the building every month, regardless of whether you sell 1 cup of coffee or 100 cups. The rent remains the same. This is called **Fixed Cost (Fixed Cost)**

Fixed costs are expenses that a business must pay regardless of the level of production or sales. These costs remain constant over a certain period, making them a heavy burden for entrepreneurs who need to plan their finances carefully.

### Essential Fixed Costs Entrepreneurs Must Know

**Rent** – for the premises, office, or factory. This amount must be paid in full every month, even if your business is quiet.

**Employee Salaries** – if you hire full-time staff, their salaries stay the same throughout the month, regardless of workload.

**Insurance** – business insurance, asset insurance, or liability insurance. These figures are calculated and paid based on verified amounts.

**Depreciation** – when you purchase machinery, vehicles, or other assets, their value is recorded as depreciation each year, which is a form of fixed cost.

**Loan Interest** – if you borrow money to expand your business, the interest you pay is a fixed cost that must be paid every month, whether your business is profitable or not.

Understanding fixed costs is crucial for setting sales targets and planning growth. If you know how much fixed costs are per month, you can calculate how much you need to sell to cover these expenses. This is the break-even point that all entrepreneurs must find.

## What Are Variable Costs (Variable Costs)?

Unlike fixed costs, variable costs increase or decrease depending on how much you produce or sell.

Returning to the coffee shop example, raw materials for making coffee (coffee beans, milk, sugar) are variable costs. If today you sell 50 cups of coffee, you need to buy more raw materials. If you only sell 5 cups, you use fewer raw materials.

### Examples of Variable Costs in Business

**Raw Materials** – everything used to create the product. The more you produce, the more raw materials you need to buy.

**Direct Labor** – workers paid based on hours worked or results. If there’s no product to produce, you might not need to pay them.

**Energy and Water** – using more machinery means higher electricity and water consumption.

**Packaging** – each product needs wrapping or packaging. The more you produce, the more packaging you use.

**Transportation** – more products to deliver means higher transportation costs. If there are no products to send, this cost is zero.

**Sales Commissions** – if your sales staff earn commissions based on sales volume, higher sales mean higher commissions.

The advantage of variable costs is their flexibility. If the market weakens, you can reduce production, which lowers variable costs. This helps you avoid significant losses.

## Why Do Fixed Cost and Variable Cost Differ?

**Fixed Cost** – expenses that are always incurred, regardless of whether the business is busy or not. No options; you must pay in full. Sometimes called "fixed burden."

**Variable Cost** – expenses that follow the level of activity. The more you do, the higher the costs; the less you do, the lower the costs. Highly flexible.

### Real-life Comparison Example

Suppose your fixed costs are 50,000 THB/month (rent, salaries, insurance)

Variable cost per product: 100 THB

- If you sell 500 units: Total cost = 50,000 + (500 × 100) = 100,000 THB
- If you sell 1,000 units: Total cost = 50,000 + (1,000 × 100) = 150,000 THB
- If you sell 100 units: Total cost = 50,000 + (100 × 100) = 60,000 THB

See? Even if you sell only 100 units, you still have to pay the fixed costs of 50,000 THB. That’s why entrepreneurs need to find the break-even point—how much they need to sell to avoid losses.

## Why Is It Important for Business Decision-Making?

**Pricing** – knowing fixed and variable costs allows you to set a selling price that covers both and still leaves a profit, without overpricing.

**Production Planning** – understanding which costs are fixed and which are variable helps you plan products and resources wisely.

**Risk Assessment** – high fixed costs make your business less flexible; even if revenue drops, you still have to pay those fixed costs.

**Investment Decisions** – before investing in new machinery or locations, consider whether the additional fixed costs will significantly reduce variable costs and improve profitability.

## Summing Up Simply

**Fixed Cost (ต้นทุนคงที่)** – expenses that must be paid regardless of whether the business is operating or not.

**Variable Cost (ต้นทุนผันแปร)** – expenses that depend on the level of business activity.

Successful entrepreneurs deeply understand these differences and use them to plan and make smart decisions. Grasping fixed and variable costs is a fundamental part of managing a business efficiently and sustainably in the long term.