## Business Costs: Understanding the Difference Between Fixed and Variable Costs

Why are costs at the heart of a business? Because they directly determine whether your business survives or thrives. Managing costs intelligently involves distinguishing between expenses that remain constant and those that vary with production.

### Stable costs vs. Uncertain costs

**What are fixed costs?** These are expenses that a business must pay every month or year, regardless of whether you produce one unit or one thousand units. These costs are obligations that stay with the business.

In contrast, variable costs fluctuate with the rhythm of production— the more you produce, the higher the costs; the less you produce, the lower the costs.

### Fixed costs in reality: These are the expenses you must pay

Imagine your business like this: your office needs a lease, regardless of how many businesses you invest in that day.

1. **Building and location rent** - Approximately 50,000 THB per month or whatever it may be. It’s there, waiting for you to pay.
2. **Salaries of permanent staff** - Your core team needs wages, whether the order volume is high or low.
3. **Business insurance** - To mitigate risks, this remains constant over time.
4. **Depreciation of machinery** - Your assets gradually wear out, and this is a fixed cost.
5. **Interest on loans** - If you borrow from a bank, you pay interest every month, regardless of the amount.

Smart fixed cost management means setting prices high enough to cover these expenses plus profit.

### Variable costs: These follow the rhythm of sales

Opposite fixed costs, variable costs are not certain—they follow the workload:

- **Raw materials and components** - The more products you make, the more raw materials you need; no products, no costs.
- **Direct labor wages** - Workers on the production line paid according to shifts worked.
- **Electricity and water for machinery** - The more machinery used, the higher the electricity bill.
- **Packaging** - No products, no packaging; producing more requires more packaging.
- **Transportation and delivery costs** - The more you ship, the higher the shipping costs.
- **Sales commissions** - Paid per unit sold or per dollar earned.

Understanding variable costs helps you make better decisions about ordering raw materials, staffing, and production planning.

### Why is it important to distinguish?

Because **fixed production costs** and **variable costs** impact your business differently:

- If fixed costs are too high, even running at full capacity, you need to sell more to cover costs, which is risky.
- If variable costs are high but sales are low, the business loses less because you can stop production easily.

Some businesses adjust their models: they might invest in expensive machinery ( increasing fixed costs ) to reduce variable labor costs, or they might use labor to keep fixed costs low and flexible.

### Overall analysis for smarter decision-making

Businesses that clarify their total costs ( fixed costs plus variable costs ) can:

- **Set the right price** — avoiding losses and not selling too cheaply
- **Plan production** — knowing how many units to sell to break even
- **Identify weaknesses** — pinpoint where costs are high and find solutions
- **Ensure business survival** — whether the market is good or facing downturns

### Summary

Fixed costs and variable costs are not just accounting terms—they are mechanisms for managing a business. Businesses that understand these two types well and manage them effectively can make better decisions, plan efficiently, and compete successfully, regardless of market changes.