## Variable Costs vs Fixed Costs: Entrepreneurs Must Distinguish or Risk Being Hit!

If you're running a business, the terms "fixed costs" and "variable costs" must be memorized because they determine how flexible your business is and how much profit you can make.

### What are fixed costs? A manufacturing house has to pay them regardless of the outcome.

**Fixed costs** are expenses that must be paid regardless of whether the business is operating heavily or lightly. Cease operations, and you still have to pay them; operate fully, and they remain the same.

Key characteristics of fixed costs:
- **Unrelated to production volume** Whether you produce 100 units, 1,000 units, or none at all, these costs stay the same.
- **Important for pricing** They must be included in the selling price to reach the break-even point.

What are fixed costs?

- **Rent** for office, hotel, or workspace paid monthly or yearly, with no change.
- **Employee salaries** for full-time staff, fixed monthly wages regardless of sales.
- **Insurance** for products, business, or risk coverage, paid regularly with no variation.
- **Assets and equipment** such as machinery, with depreciation costs paid equally each period.
- **Loan interest** on business credit, paid according to the contract, unaffected by operational results.

See? Fixed costs are like "initial investments" that the business must bear continuously, so sufficient revenue is needed to cover them.

### Variable costs are expenses that "fluctuate with production."

**Variable costs** are expenses that increase or decrease depending on the production volume. The more you produce, the higher the costs; the less you produce, the lower the costs.

Key characteristics of variable costs:
- **Change directly with production volume** A direct relationship: producing 1 ton costs less than producing 10 tons, which costs ten times more.
- **Provide flexibility** They allow adjusting quantities to meet market demand, thus controlling costs effectively.

What are variable costs?

- **Raw materials** such as ingredients, components, and materials used in manufacturing; more production requires more raw materials.
- **Wages** for workers paid per hour or per piece, not fixed annually.
- **Electricity and water** used during manufacturing; heavier machine operation consumes more.
- **Packaging and boxes** for wrapping products; larger production requires more packaging.
- **Shipping costs** for delivering products to customers; more orders mean higher shipping expenses.
- **Sales commissions** for sales teams or agents earning commissions based on sales volume; more sales, higher commissions.

### Clear comparison: Fixed costs vs Variable costs

| Topic | Fixed Costs | Variable Costs |
|------|--------------|----------------|
| **Change or not** | Do not change regardless of success or setbacks | Change according to production volume |
| **Examples** | Rent, fixed salaries, insurance, loan interest | Raw materials, wages, electricity, packaging, shipping |
| **Flexibility** | Rigid; must be paid if committed | Flexible; can adjust quantities based on market conditions |
| **Benefits/Dangers** | Pros: Easy to predict; Cons: If sales drop, expenses still incur | Pros: Cost control; Cons: Need constant monitoring |

### Combining both costs for analysis

**Total Cost = Fixed Costs + Variable Costs**

Understanding this mixed cost structure is crucial for:

- **Pricing products appropriately** to ensure profitability by covering both costs.
- **Production planning** to know which costs can be adjusted and which are fixed.
- **Investment decisions**: Investing in machinery increases fixed costs but may reduce variable costs; weighing these effects is essential.
- **Market fluctuation assessment**: During downturns, fixed costs still need to be paid, while variable costs can often be reduced.

Businesses with high fixed costs need high sales volume to break even, whereas those with low fixed costs are more flexible but may have limited expansion potential.

### Use this knowledge effectively

By understanding this cost structure, entrepreneurs can:
- **Reduce variable costs** by sourcing cheaper raw materials or negotiating with suppliers.
- **Optimize fixed costs** by sharing spaces or offices with others.
- **Forecast clearly**: Knowing costs allows setting accurate sales targets.

Therefore, the key lesson is: **Study your business costs deeply, clearly distinguish which are fixed and which are variable**, then plan cost management systematically. Only then can your business grow steadily and sustain profits.