Most business owners know what their costs are. Far fewer know which of them would still be there if the work stopped.
That distinction matters more than it sounds, because it determines how quickly trouble arrives when sales fall — and how quickly profit arrives when they rise.
The basic split
Variable costs move with sales: materials, subcontractors, delivery costs, card fees. Sell nothing, spend nothing.
Fixed costs continue regardless, at least in the short term: rent, salaries, software, insurance.
What happens when sales fall
Monthly sales: £15,000
Materials and subcontractors: £9,000
Rent: £1,500 · Salaries: £3,200 · Software, insurance and accountancy: £1,300
Total costs £15,000 — the business is at break-even
Now suppose sales halve to £7,500.
If variable costs move in line with sales, the £9,000 falls to around £4,500. But the £6,000 of fixed costs does not change.
Costs £10,500 against sales of £7,500 = a loss of around £3,000 a month
Sales fell by 50%. Costs fell by only 30%. That gap is what fixed costs do to you when revenue drops, and it is why a business can go from breaking even to losing £3,000 a month without a single thing being mismanaged.
Almost nothing is perfectly fixed or perfectly variable
This is where the textbook split stops being useful.
Rent is fixed until the lease ends. Salaries are fixed until staffing changes are made, and those changes carry notice periods and cost. Software often increases in steps rather than smoothly. Some costs would eventually fall but not immediately — stock already ordered, subcontractors already booked, contracts with notice periods.
So the useful question is not “is this cost fixed or variable?”
It is: if sales halved next month, which of these costs would actually fall, by how much, and how quickly?
That is a cash flow question as much as a classification exercise, and the timing is the part that matters. A cost that falls in six months does not help you in month two.
The same structure works in your favour
Fixed costs are not simply a risk. They are also why growing businesses can become profitable quite suddenly.
If every additional £1 of sales leaves 40p after variable costs, that 40p goes towards covering your fixed costs. Once break-even is passed, the same 40p contributes directly to profit. Nothing about the business changed. You simply crossed the line where the fixed base was covered.
This is also why two businesses with identical turnover and identical profit can carry completely different levels of risk. The one with a high fixed-cost base makes more money when things go well and loses more when they do not.
A practical exercise
Take your last twelve months of costs and mark each one:
- Fixed — continues regardless
- Variable — moves with sales
- Somewhere in between — and note what would have to happen before it reduced
That third category is usually the largest, and it is the one worth spending time on. For each item, ask what the trigger is: a lease break, a notice period, a contract renewal, a decision you would have to make.
Most people find the genuinely fixed share of their cost base is larger than they thought.
Why it connects to everything else
Your fixed costs drive your break-even point. They also determine your cash runway, because runway depends entirely on which costs would continue if no new sales came in.
Knowing the split is what turns “we need more sales” into a specific, answerable question.
If you would like help working through your cost base and what would really happen in a downturn, book a consultation.
