Question

If you were a small business owner would you want to most of your costs fixed or variable?

Answer 1

Fixed cost is the fixed expense which remains same month on month. THis cost would be incurred even if there is no sales whatsoever. For eg if you have setup a bottle factory even you do not make any sale of the bottles for the current month, you will have to pay the property rent.

Variable cost is strongly related to the revenue. It is the cost associated with the production or the selling of your products or services. Continuing with the same example of bottle store, the salary expense associated with your factory workers, the cost of raw maaterial etc.

With this broad categorization of costs, let us visualize a small business. Small business will tend have low negotiating power both with their suppliers (raw material) and customers, making it difficult to reduce the overall cost be it fixed or variable. But it is more advisable to have a tight control on the variable cost as it is direct tandem with the revenue. Inspite of low negotiating power both with suppliers and customers, a good operation management can reduce the variable cost.