What are fixed costs?

Definition

Fixed costs are the bills that hold still when traffic changes. On the books, they are period expenses that do not rise or fall with each extra sale.

A coworking space pays the same monthly lease if twenty members walk in or two hundred. The lease is this kind of cost because the space, not the day's traffic, sets the amount.

Accrual books record the month's rent even if the check has not gone out. Cash-basis books wait until cash leaves the operating bank account.

These costs are the floor the business has to cover. They are not the snacks or day-pass supplies that rise when more people show up.

Where it shows up

P&L: Located in operating expenses, rent, and similar lines that do not move with sales.

Balance Sheet: Related to prepaid rent and accrued occupancy still sitting unpaid.

Cash flow: Decreases when rent is paid, reported cash from operating activities decreases.

See also: Variable Costs · Break-Even Point · Operating Expenses

When you look at your Income Statement, these costs sit in the operating-expense block. Rent, insurance, and a salaried manager usually stay put while revenue moves.

A high rent line does not mean a busy month. It means the space is expensive relative to the sales sitting above it.

The Balance Sheet does not list a standing fixed-cost total. Related amounts show up as prepaid expenses when rent is paid ahead, or as accrued liabilities when the month is used but the bill is still open.

On the Statement of Cash Flows, paying the landlord is the cash event. Cash from operating activities falls when the check clears, even if the Income Statement already recorded that month's rent.

Accounts payable may hold an unpaid occupancy bill until cash leaves. That unpaid amount is a current liability until the payment posts.

How it works

The space signs a lease, an insurance policy, or a salaried role that does not change with each extra desk. Those agreements set a monthly amount before the first member walks in.

Each period, the books record that amount as expense for the period. The amount stays in the same range whether memberships rise or fall.

If rent is paid in advance, the payment first sits as a prepaid asset. Each month then moves one slice of that prepaid balance into expense.

If the month is used before the bill arrives, expense is recorded and a liability sits until payment. The cost still belongs to this period, not to the week the check is written.

Stay with the bills that do not flex with traffic. A coffee order that doubles on a busy Tuesday is a different kind of cost.

A fixed amount can still change when a contract renews or a new location opens. The point is that it does not move automatically with this week's sales.

Overhead allocation may later spread some of these dollars across rooms or membership types. The cost itself is still the same lease; the split is only how it is assigned.

Keep the lease, the insurance binder, and the salary schedule with the period close. Anyone tying the Income Statement to the space should see why those lines did not move.

Example

Harbor Desk is a coworking space with one floor. The monthly lease is $12,000, insurance is $800, and the community manager's salary is $5,200.

Those three bills total $18,000 every month. They stay $18,000 if the space sells 40 memberships or 120.

In a quiet month the space collects $20,000 of membership revenue. After the $18,000 of fixed bills, $2,000 is left to cover supplies, card fees, and profit.

In a busy month the space collects $42,000. The same $18,000 of fixed bills now leave $24,000 before those other costs.

The Income Statement shows the same rent and salary lines in both months. Sales changed; the fixed bills did not.

Harbor Desk does not post a line that says "fixed costs." The books post rent, insurance, and salary, and those lines happen to stay put.

Common mix-ups

Fixed costs are not the same thing as unpaid bills. A cost can be fixed and already paid, or fixed and still sitting in accounts payable.

Fixed costs are not the same thing as operating expenses as a whole. Some operating lines stay put; others move with each extra member.

Fixed costs are not frozen forever. A lease renewal or a second floor can raise the floor, but that change comes from a new contract, not from this week's traffic.

Related terms

• Variable Costs: Costs that rise and fall directly with sales volume.
• Semi-Variable Costs: Costs with a fixed base plus a usage-driven portion.
• Break-Even Point: The sales level at which total revenue exactly covers total costs.
• Contribution Margin: Revenue minus variable costs, showing what is left to cover fixed costs.
• Operating Expenses: The ongoing costs of running the business that are not direct costs of sale.
• Rent Expense: The periodic cost of occupying leased space.
• Overhead Allocation: The method for spreading indirect costs across products, jobs, or departments.
• Operating Leverage: How much profit swings when revenue moves, given the mix of fixed and variable costs.