As an accounting firm specializing in venture-funded startups, we often work with founders navigating startup finances for the first time. One important financial concept founders need to understand is fixed costs – understanding these costs can help you make smarter financial decisions, help optimize your cash flow, and let you plan for growth more effectively. Fixed costs are essentially the same as overhead costs, and another term that’s become somewhat interchangeable with fixed costs is selling, general, and administrative (SG&A) expenses.
What are fixed costs?
Fixed costs are expenses that remain constant regardless of your startup’s revenue or production levels. Unlike variable costs, which fluctuate based on business activity (e.g., marketing spend, cost of goods sold), fixed costs must be paid regardless of sales.
Examples of fixed costs for startups
Startups typically encounter these fixed costs:
- Office rent or coworking space fees
- Salaries for full-time employees (founder salaries may vary based on funding)
- Insurance premiums (e.g., liability, health, workers’ comp)
- Loan repayments (venture debt, bank loans)
- Equipment depreciation (hardware, machinery)
- Software subscriptions and licenses (SaaS tools, CRM systems)
- Legal and accounting fees
- Cloud infrastructure costs (for SaaS startups)
Why fixed costs matter for startups
Fixed costs impact your startup’s financial planning, investment decisions, and long-term sustainability. Some of the ways fixed costs affect your business include:
- Break-even analysis. Knowing your fixed costs helps determine the revenue needed to cover expenses and start making a profit. You can use this simple formula:
Total Fixed Costs ÷ (Price Per Unit - Variable Cost Per Unit) = Break-Even Point
- Budgeting and cash flow forecasting. Fixed costs provide a stable foundation for financial projections, allowing your startup to plan for runway and fundraising needs.
- Pricing strategy. Your pricing model should account for both fixed and variable costs to make sure you reach profitability.
- Scaling considerations. As your startup grows, new fixed costs (e.g., hiring employees, expanding office space) must be strategically planned to avoid cash flow issues.
- Investor communications. Investors want to see a clear cost structure, including fixed costs and operating leverage – how well your startup can scale revenue without proportionally increasing expenses.
Strategies to manage fixed costs
Startups should proactively manage their fixed costs to optimize their cash flow and extend their runways. Here’s are some ways:
- Regularly review and optimize. Audit your fixed costs quarterly to identify any unnecessary expenses. Are you renting more space than you need? Do you have unused software licenses?
- Turn fixed costs into variable costs. Consider flexible alternatives like coworking spaces instead of long-term leases or contractors instead of full-time employees. Check your software licenses – can you pay as you go, or switch to usage-based pricing, instead of an annual enterprise license? Can you lease rather than buy computers or other equipment?
- Negotiate better terms. Talk to your landlords, software providers, and service vendors to see if you can get better terms. Do some research – are there lower-cost alternatives? Can you get discounts for bulk, long-term, or bundled services? Can you get discounts for early payments?
- Leverage technology. Automating processes can help reduce labor costs and improve efficiency. Can you switch to cloud-based storage instead of paying for in-house servers? Can you automate workflows or eliminate manual data entry? Can you use virtual collaboration tools for remote work instead of paying for office space.
- Plan for growth. As you scale, make sure any new fixed costs align with projected revenue growth. Use milestones to trigger spending decisions, like hiring more employees only when you reach a revenue goal. If your revenue slows, delay any fixed-cost commitments.
Master fixed costs to build your startup
Fixed costs are a key driver of your startup’s financial health. Managing them effectively helps optimize cash flow, plan for growth, and make informed decisions.
Need help analyzing your startup’s cost structure? Kruze Consulting specializes in helping venture-backed startups optimize finances, extend runway, and impress investors. Let’s talk!
