Train With Tanner Tuesday: Budgeting Basics (M3|L3): Understanding Fixed & Variable Expenses

Introduction

This lesson provides a comprehensive overview of fixed and variable expenses, incorporating examples and exerises to Facilitate understanding among students.

1. Definition of Fixed and Variable Expenses:

Fixed expenses are the costs that remain constant over specific period, regardless of production or sales volume.

Variable expenses are costs that fluctuate based on business activity or consumption levels.

2. Examples of Fixed & Variable Expenses:

Some examples of fixed expenses include: rent or mortgage payments, property & liability insurance, business loans and equipment financing, salaries for permanent employees, and utilities such as electric, water, and internet.

Some examples of variable expenses include: your business’s COGS or cost of goods sold (that is the raw materials or inventory used to create your products or services); marketing and advertising costs (such as promotional flyers and social media ads); utility bills with usage-based charges; travel and transportating expenses; and inventory & replenishment costs (such as merchandise, food and office supplies).

3. Differentiating Between Fixed and Variable Expenses:

As previously mentioned, fixed expenses remain constant regardless of business activity, while variable expenses fluctuate. Fixed expenses are often contractual or recurring payments while variable expenses are more discretionary and dependent on business needs.

4. Importance of Fixed and Variable Expenses in Budgeting and Financial Planning:

Fixed expenses provide predictability and stability in budgeting. Variable expenses require flexibility and adaptability in budgeting to accommodate changes in business conditions. Understanding the ratio of fixed to variable expenses helps businesses assess their cost structure and make informed decisions.

Conclusion

Let’s close this lesson by summarizing what we learned in this module:

First, we defined fixed and variable expenses. Second, we reviewed several examples of both fixed and variable expenses.

Third, we differentiated the two by clarifying that fixed expenses are constant while variable expenses fluctuate with business needs.

Fourth, we learned that fixed expenses provide some stability in our budgeting while variable expenses require us to be flexible.

And lastly, we learned that business owners can make better decisions by observing the ratio of fixed-to-variable expenses in how it affects their cost structure.

Thank you for joining us for this Module 3, Lesson 3. We look forward to seeing you next time on Train with Tanner Tuesday.

Yours in success,

John W. Tanner, J.D.|M.S.

Small Business Coach

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