When starting a business, every decision you make about leasing space, signing up for internet access, or paying employees can impact your long-term success. These fixed expenses can make or break your startup's success.
More than 50% of small-business owners admit that they have less than $5,000 set aside for emergencies. Whether you sink or swim in the early days of your business is largely dependent on how you manage fixed expenses.
Managing your expenses and keeping your monthly costs low can give you a greater chance for success as a startup. Founders can do this in several ways, from tracking and analyzing spending patterns to using expense management software. However, no matter your approach, the key is knowing and monitoring your fixed expenses to ensure they don't creep up or get out of hand.
What Are Fixed Expenses?
Fixed expenses, or fixed costs, are regular and predictable expenses you must pay consistently. These expenses are typically closely related to your business operations, such as rent and utility costs.
Fixed expenses can make up a large portion of your overall spending, so it is essential to minimize them wherever possible. By understanding how much you spend on fixed costs, you can make better-informed decisions on allocating your resources and budgeting.
Common Examples Of Fixed Expenses For Startups
Now that you have an overview of fixed costs let's look at some of the most common fixed expenses for startups:
- Rent or lease payments – Payments you make to rent or lease office space or equipment.
- Utilities – Electricity, water, internet access, phone service, and more.
- Personnel costs – Salaries, wages, bonuses, and employee benefits.
- Insurance – Liability insurance, workers' compensation insurance, and other types of coverage.
- Taxes – Payroll taxes in addition to yearly general business tax obligations.
- Software or technology fees – Subscription fees for software or technology services you need to run your business.
Looking At Fixed Expenses On Your Financial Statements
Your financial statements include a comprehensive overview of your profits and losses. The indirect expenses section of the income statement shows your fixed expenses, which lead to your operating profit.
These same fixed costs on the income statement show up on your balance sheet and cash flow statement. On the balance sheet, they may be either short- or long-term liabilities. Your cash flow statement will reflect the cash you've used to cover these expenses.
By studying and understanding the data on your financial statements, you will better understand how much you spend on fixed costs and where those funds go. You should regularly review and budget fixed expenses to optimize your spending.
Fixed vs. Variable Expenses
Fixed expenses are essential to running your business. They continue to accrue regardless of changing situations. Rent, utilities, and salaries all fall under this bucket.
Variable costs may include travel, marketing, or advertising expenses. You can manage these costs differently than fixed costs since they don't occur as frequently or with the same consistency. However, setting aside funds for these expenses is essential to avoid cash flow problems later.
How To Manage And Calculate Fixed Expenses As A Startup
Startup founders should keep fixed expenses to a minimum wherever possible. Here are some tips for managing and calculating fixed costs:
- Identify all fixed expenses – Include everything from rent and utility costs to personnel and insurance. A complete list of all the cash flowing out allows you to create a budget reflecting each month’s deductions.
- Prioritize and rank expenses to determine what is most important – Prioritizing will help you allocate resources where your business needs them most. If your business cannot function fully without certain expenses, these need to be at the top.
- Negotiate to reduce expenses when possible – Negotiating can help you save money on contracts and services. Feel free to ask for discounts or better terms. Vendors often offer discounts to customers with longstanding on-time payments and those that pay early.
- Implement strong financial management – Budgeting and planning are essential to keeping track of any type of expense. Enlisting the help of a finance professional can help you create a plan for managing and allocating funds.
Consider investing in expense management software – It's not enough to track and manage expenses. You'll also need access to data and insights to help you make smarter decisions. Software solutions can help automate and streamline your expense management process by providing real-time visibility into your spending and budgeting.
Tips For Minimizing Fixed Expenses
Startups can benefit from cutting excess costs and reducing their fixed expenses. With better cash flow management and more intelligent budgeting, businesses can save money and remain competitive. Here are some tips for minimizing:
- Use flexible or shared workspaces – Instead of renting an office, consider using coworking or other flexible workspace options. Shared spaces are a great way to reduce overhead costs while providing employees with a comfortable working environment.
- Use open-source or free software and technology – Many businesses rely heavily on expensive software, but you can often find cheaper alternatives that are just as effective. Research your options carefully to get the most bang for your buck.
- Outsource nonessential tasks – If a particular task doesn't require an in-house specialist, consider outsourcing it. Outsourced services can help you save money while effectively getting the job done.
- Negotiate prices and contracts – Some vendors and service providers may be willing to negotiate or offer better terms. Don't hesitate to ask for discounts or concessions to help your business save money.
Fixed-Expense Budgeting Best Practices
As your startup grows, fitting fixed expenses into your budget can become increasingly challenging.
To ensure your business has enough resources to survive, consider implementing some best practices for fixed-expense budgeting:
- Monitor and track expenses regularly.
- Establish a baseline budget that accounts for all fixed costs.
- Understand cash flow patterns and adjust your budget accordingly.
- Set aside funds for unexpected expenses.
- Make sure to prioritize your spending based on what is most important to the business.
- Look for opportunities to reduce costs and maximize efficiency.
- Hire a finance professional to help you with budgeting and financial management.
Comprehensive financial management will help your startup stay on track with its fixed expenses and improve its financial position. You can focus on innovation, growth, and profitability with the right strategies.