Ficcos vs Variable Costs: Entrepreneurs Need to Know to Increase Profits

Every business, whether small or large, faces two types of expenses: Fixed Costs and Variable Costs. The difference between these two determines how well your business can compete and how much profit can grow in the future. Good cost management is the secret of successful entrepreneurs.

What Are Fixed Costs and Why Are They Important?

Fixed costs are expenses that do not change regardless of sales volume. Whether your business produces 1 or 1,000 units, fixed costs remain the same. Even if you produce nothing, you still have to pay them.

Think of it this way: When you rent an office building, you pay rent every month whether your business makes money or incurs a loss. Fixed costs are the “mandatory payments” that are crucial for financial planning.

Fixed costs have an interesting characteristic: as sales increase, the fixed cost per unit decreases. For example, if the factory rent is 100,000 THB/month and you produce 1,000 units, the rent per unit is 100 THB. If you produce 2,000 units, the rent per unit drops to 50 THB. This is why larger businesses often have higher profits.

Examples of Fixed Costs You Should Know

• Rent: Cost of operating space regardless of occupancy
• Salaries: Fixed wages for permanent staff and management
• Insurance: Business insurance, asset insurance, liability insurance
• Depreciation: Machinery, buildings, equipment depreciation per month
• Loan interest: Monthly interest paid to banks or lenders
• Contracts: Software licenses, system memberships

How Do Variable Costs Work and How Are They Different from Fixed Costs?

Variable costs are the opposite of fixed costs. They change in proportion to production volume or sales. The more your business produces or sells, the higher the variable costs. Conversely, when production decreases, variable costs decrease accordingly.

In other words, variable costs are “flexible costs.” Fixed costs must be paid regardless, but variable costs can be controlled through management decisions.

Clear differences:

• Fixed Costs: Unchanging / Must be paid / Used for long-term planning
• Variable Costs: Change / Controllable / Flexible based on operations

Real Business Examples of Variable Costs

• Raw materials: More units produced require more raw materials
• Production wages: Wages based on hours worked
• Energy: Electricity and water costs increase with production volume
• Packaging: Boxes, paper, wrapping materials increase with more products
• Transportation and shipping: Shipping costs rise with the number of items sent
• Commissions: Sales commissions increase with higher sales volume

Analyzing Mixed Costs to Increase Profitability

Entrepreneurs should combine fixed and variable costs to determine the total actual cost. This analysis helps you make better decisions.

Simple formula: Total Cost = Fixed Costs + (Variable Cost per Unit × Number of Units)

Example: If fixed costs are 200,000 THB/month, variable cost per unit is 50 THB, and you produce 1,000 units: Total Cost = 200,000 + (50 × 1,000) = 250,000 THB

Cost per unit = 250,000 ÷ 1,000 = 250 THB/unit

If you set a selling price of 400 THB/unit, profit per unit is 150 THB.

Tips to Increase Profit:

1. Reduce Fixed Costs: Negotiate lower rent, cut unnecessary expenses
2. Lower Variable Costs: Negotiate raw material prices, improve production efficiency, reduce waste
3. Increase Sales Volume: Selling more reduces fixed cost per unit and increases overall profit

Using machinery instead of labor is a good example: fixed costs increase (machine price), but variable costs decrease (less labor needed), and production volume increases.

The Importance of Managing Both Types of Costs

Understanding fixed and variable costs isn’t just academic; it’s vital for survival, growth, and profit in real business.

Smart entrepreneurs:

• Understand their true costs
• Price products to cover costs and generate profit
• Plan investments to reduce long-term costs
• Monitor costs regularly and improve continuously

Fixed costs are challenging; variable costs are controllable. Mastering the management of both is the true art of doing business.