Fixed and variable costs

Fixed cost

Fixed cost value does not change and has a predictable value. Most of the cost you see in a contract are fixed cost. For example, the rent advance in a rental agreement is a fixed cost. Another example of a fixed cost would be the signup bonus mentioned in a CEO’s offer letter. Monthly rent, monthly utility bill, wages, etc are fixed costs because these are predictable and does not change based on usage. Fixed costs include ongoing costs such as utilities, wages, monthly software licensing, etc.

Variable cost

This is a very important cost to track and beware. Variable costs can hurt you so much and these costs hurt you especially when you are completely unprepared. Variable costs are mostly usage-based, for example, a metered utility bills, unexpected repair and maintenance costs or any unplanned expenses. In order to emphasize the consequence of not planning these costs, let us consider a classic drop shipper’s mistake. The accumulating cost price for an item in dropshipping is a typical example of a variable cost.

When you make a sale in the dropshipping model, you go and buy the item for a negotiated cost price from your supplier. And then you request your supplier to send that item to your customer on your behalf with your custom branding. You expected 10 sales per day but let us say you suddenly got 100 sales per day instead. You have enough funds in your bank account to manage the cost price for 10 sales orders. Now suddenly you got 100 sales and you do not have enough funds in your bank account to manage the cost price for 100 sales. This is a classic problem for a drop shipper who missed to consider the variable cost associated with procurement.