Fixed, Variable and Semi-Variable Expenses

Part B: Understand the Money

Say a roofer has a slow month. His truck payment does not care. His insurance does not care. But the shingles he buys go down when he does fewer jobs, and so does the fuel he burns driving to job sites. Some of his costs moved with his work, and some sat there like furniture.

That is the whole idea in this lesson. Not every cost behaves the same way when your sales change, and knowing which behaves how tells you what a slow month will do to you and what a big month will really cost.

Fixed expenses

Fixed expenses stay about the same whether you sell a lot or a little. Rent, insurance, loan payments, software subscriptions, a salaried office manager, and the base fee on your phone plan are typical. They are due on their schedule, and slow months do not reduce them.

Fixed does not mean permanent. You can renegotiate a lease or cancel a subscription, but not quickly and not usually in the month you are struggling. That is why they deserve the most respect. They are the bills you owe before the first customer calls.

Variable expenses

Variable expenses rise and fall with the amount of work you do. Materials for a job, supplies for a cleaning route, food for a restaurant, fuel, credit card processing fees, and hourly helpers you only call when there is work. Do more jobs and they go up. Do fewer and they shrink on their own.

Variable costs are the friendly ones in a slow month, since they shrink with sales. They are also the ones to watch when you price. Say a job sells for $2,000 and its materials and helper cost $1,200. Then $800 is what that job leaves toward your fixed bills. That is a simplified illustration, but it is how your fixed costs get paid, one job’s leftover at a time. There is more on this in Gross Margin Versus Net Margin.

Semi-variable expenses

Then there is the group people forget, the costs that have a base and a moving part. A phone plan with overage charges. A truck with a fixed payment plus fuel and wear that grow with mileage. Electricity in a shop that has a minimum charge and then climbs with use. A sales rep on a base salary plus commission. Advertising can behave this way, too, if you set a floor and add more when leads are strong.

Split them. Put the base amount in your fixed list and the moving part in your variable list. It takes a few minutes and it clears up a lot of confusion when you build a forecast or a break-even figure.

A quick example with made-up numbers. Say a small plumbing business pays $1,500 a month in fixed costs like insurance, software and a storage unit. Parts and helper wages for a month of work come to $2,500. The owner’s own pay is not in those numbers, so whatever is left has to cover it. If the month brings in $5,000, the business has $1,000 left for the owner. If the month brings in only $3,000, parts and wages fall to about $1,500, but the $1,500 of fixed costs does not, and nothing is left: a month of work for free. Knowing which side each cost sits on lets you see that coming, and decide before the slow month arrives whether to cut, wait or go find more work. That is a far better position than finding out from the bank balance.

Some judgement is involved. A cost that looks fixed in a year may turn out to step up when you hire a second crew, since you need another truck and more insurance. Costs that jump at certain points are worth a note beside the line.

Set it up this week

Take your last three months of bills and bank statements and sort every expense into fixed, variable or semi-variable. For each semi-variable one, split it into base and moving part as best you can. Add up the fixed column, then add the pay you need to take home. That total is what your jobs have to leave over each month, after their own materials and labor, to keep the doors open, and it is the number the Break-Even Calculator on the Resources page asks for.

About one to two hours, most of it spent reading through statements. It costs nothing but attention. If you use bookkeeping software, the categories may already be there and the job takes less. When you finish, look at the biggest fixed line and check whether you have questioned it since the day you signed up.