Last Updated: February 1, 2023
If you’re like most business owners, you’re always looking for ways to cut costs and improve your bottom line. One of the best ways to do this is by understanding your variable and fixed expenses. In this blog post, we’ll explain what are variable expenses, give some examples, and teach you how to find them in your own business. We’ll also discuss the difference between variable and fixed expenses, and the ways to reduce variable expenses so you can make more informed decisions about where to allocate your resources.
What Are Variable Expenses?
Variable expenses are costs that fluctuate from month to month or even week to week. They can be influenced by a variety of factors, such as the number of employees you have, the amount of inventory you need to maintain, and the seasonality of your business. The variable cost or expense also changes in proportion to how much your company produces or sells, which means the variable cost will increase with increased production, and fall with decreased production.
Let’s look at some variable expenses examples to understand the term better.
Utility payments such as electricity, gas, and water bills can fluctuate based on usage. For example, if you run a manufacturing business, your utility bills will likely be higher in the summer when you’re using air conditioning to keep your workspace cool.
Company’s Credit Card Transaction Fees
If you accept credit cards as payment, you’ll need to pay transaction fees each time a customer uses their card. These fees can range from a few cents to several dollars, depending on the type of card and the amount of purchase.
Another example of variable expenses are shipping costs. If you sell physical products, your shipping expenses will vary depending on the weight and size of the items you’re sending, as well as the shipping distance. You may also incur additional costs if you need to expedite shipping or ship to multiple locations.
While employee salaries are a fixed cost for most businesses, there are some situations where they can be considered a variable expense. For example, if your employees are paid hourly, their wages will vary based on the number of hours they work. Additionally, sales commissions and bonuses can also fluctuate from month to month.
Credit Card Payments
Other variable expense examples are credit card payments. While running a business, you can get various types of business credit cards, such as secured business credit cards, credit cards for LLCs, small businesses, startups, and even for those who have bad credit. Although you have to pay the interest each month, the amount varies depending on your interest rate, the loan amount, and how payments you have left. That’s why this often appears under variable expenses.
|Did You Know: In some accounting statements, variable cost is also referred to as Cost of Goods Sold or COGS, so don’t get confused if you see COGS instead of variable costs in a financial statement!
How to Find Variable Expenses?
Since they fluctuate on a monthly basis, finding your variable expenses can be a bit tricky. However, it’s important to calculate them to get your finances right, and there are a few different ways to identify variable components in your business. The first is to review your financial statements from previous months or years and look for any costs that fluctuate. You can also track your expenses on a month-to-month basis and look for patterns over time. Finally, if you have a budget for your business, you can identify which expenses are variable and which are fixed.
Many business owners also take the help of the variable expenses formula, which considers the amount per unit produced to calculate the variable expenses:
Total variable cost = Cost per unit x total number of units.
For example, if your business sells products and you incur $50 in shipping costs for every 100 items you sell, your total variable shipping costs would be $50 x 100 = $5000.
|Variable expenses are costs that fluctuate from month to month depending on your business.
|Some examples include utility payments, shipping costs, credit card charges, sales commission, etc.
|You can calculate your variable expenses by reviewing your previous financial statements or by tracking the expenses on a month-to-month basis.
|You can also use the formula: total variable cost = Cost per unit x total number of units to calculate the variable cost.
Fixed vs Variable Expenses
Now that you know what variable expenses are, it’s important to understand how they differ from fixed costs—while the former can fluctuate based on a number of factors, the latter are monthly fixed costs that always remain the same.
Examples of Fixed Expenses
Here are some examples of fixed expenses that can also be referred to as a corporate expense when grouped together.
Rent is a fixed expense you pay each month to use a commercial space for your business. The amount you pay will depend on the size and location of your office or retail store, as well as the length of your lease.
Although many business owners wonder if office supplies are fixed or variable expenses, office supplies are a fixed expense for most businesses. This includes items like paper, ink, and toner for your printer, as well as envelopes, pens, and pencils. The amount you spend will depend on the size of your business and how often you need to restock supplies.
Insurance is a fixed expense that protects your business from risks such as property damage, liability, and theft. The amount you pay will depend on the type of coverage you need and the size of your business.
The interest of your business loan is also a fixed payment, and can affect your business cash flow significantly. It’s important for you to understand how business loans work to find the best business loan, especially if you’re looking for a business loan with bad credit.
Fixed and Variable Expenses Main Features Compared
Now that we’ve looked at the examples of fixed and variable expenses, let’s understand the differences between the two in terms of specific features.
One of the key differences between variable and fixed expenses is that fixed expenses are often necessary to keep your business running, while variable expenses can be more discretionary. For example, you may be able to reduce your variable marketing costs by cutting back on advertising or reducing the number of trade shows you attend. However, you can’t reduce the rent or insurance costs, as they’re a necessary category of costs to keep your business running.
Another key difference between fixed and variable expenses is that fixed costs are usually easier to predict than variable costs, as they don’t fluctuate as much and you generally have an idea of how much you’ll need to pay each month. Variable expenses, on the other hand, can be more difficult to predict, since they can be influenced by so many different factors related to production and the market.
|Did You Know: Apart from fixed and variable costs, there are also semi-fixed costs or mixed costs you can incur while conducting your business that have the characteristics of both variable and fixed expenses.
How to Save on Variable Expenses?
Now that we’ve determined the definition of variable expenses, let’s look at a few ways to reduce your variable expenses and thereby your total expenses while running a business:
One of the biggest variables in any business is manual labor—as your production output increases, so will your labor cost. To save money on manual labor costs, you can automate your business processes, which will not only reduce labor costs but also improve the efficiency and quantity of output. While you may think this will cost a lot, that’s not always the case. For example, a POS system for small businesses can keep track of your sales, profits, and gross profit at a reasonable cost.
Economies of Scale
Monthly variable expenses can also be reduced by taking advantage of economies of scale, meaning you’ll produce or purchase more units of goods or services at a lower per-unit cost. So, if you ramp up production, the contribution margin will increase because you’ll be paying less per unit. For example, if you’re a manufacturer, you may reduce the manufacturing company’s cost by installing the right machinery instead of relying on labor for producing the goods.
As the production level increases, businesses tend to engage in inefficient workflows, which not only reduce your productivity but are also time-consuming and increase your total costs in the long run. You can take the help of workflow software to streamline your workflow and create a productive business environment.
Variable expenses in a business can also be reduced by using aftermarket consumables. As your level of production or consumption increases, the packaging cost increases as well, including both the cost of packing material as well as consumables. If you use aftermarket consumables instead, such as printer ink and toner, you can save money on variable expenses, as aftermarket consumables are usually much cheaper than the original equipment manufacturer (OEM) versions.
Variable expenses fluctuate from month to month, often increasing as the sale volume or output increases, while fixed expenses such as rent or loan payments stay the same each month. Some examples of variable expenses include utilities, fuel, and inventory costs. You can save money on variable expenses by taking advantage of economies of scale, automating your business processes, streamlining your workflows, and using aftermarket consumables.
You should do this because fixed expenses are often necessary to keep your business running, while variable expenses can be more discretionary. As such, it may be easier to cut back on variable costs if you need to reduce your overall spending.
The best time to plan your fixed and variable monthly expenses is at the beginning of each month. This will give you a clear picture of your financial situation, helping you make informed decisions about your spending.
Fixed expenses are those that stay the same each month, such as rent and loan payments. If we talk about what are variable expenses, these are the expenses that fluctuate from month to month, such as utilities, fuel, and inventory costs.