In this article we will further examine regularly recurring costs, for their impact on free cash flow.

What are fixed expenses

Fixed expenses are costs that return every single year, such as subscriptions or depreciation. These costs will happen whether you actually do something or not. The exact amount does differ, mostly in excess of inflation; a profit margin will be added at some point in the supply line.

Variable costs, that change with the amount of activity could also be considered as fixed expenses. For example: Using power tools is not something you do every day, all day, in your home. But there is a baseline of electricity that you do use, therefor power charges can become fixed. With a variable component added to them.

Different types of fixed expenses

Not al fixed expenses are equally fixed, some can even be removed entirely, such as after the ending of a contract.

Fully mandatory

These are the expenses that you really cannot do without: Housing, food and water for individuals. For corporate readers it is anything that is essential for their business, such as HR for medium size upwards.

Primary production processes are fully fixed for both as regular workers will have these as their job, where companies need them to make any money. Both companies and private people could do a regular check of all processes to see if anything can be done without. It is recommended to do so each year, but continuous vigilance is better: Avoiding senseless spending is a lot better than paying for something you do not need for any amount of time.

Somewhat optional

Most types of insurances are fixed expenses in how you pay for them, but not really mandatory. This means that you can drop them, but if you don`t it is a fixed expense.

Should be noted that most of these, the non-mandatory kind of insurance, includes people simply not paying attention and auto-renewing them every year. Think travel insurance for someone who only travels far and wide every few years, but has more local journeys on a regular basis: This person does utilise the insurance, but is likely overinsured. Local travels are not always covered and familiarity, to a certain degree, with your surroundings does decrease risks.

Finding a cheaper alternative is also possible in most cases, the expense itself does remains fixed.

Short term impact

More immediately fixed expenses are something which is supposed to add value, to continue using the example of insurance: You recently encountered a risk, for which you are now insured. Regularly you will have to pay in advance, so in the shorter term it is rather pricey, but this does mean that you will not have to think about paying for some time to come. Nor will you have to worry about that particular problem any more.

In some cases you will also have to update the books: Fixed expenses can require special project setups in larger organisations. So think about what you are trying to do before committing to anything*.

Long term impact

It will be a recurring event, so we are talking about a lot of money leaving your account over the years. It is important to consider the future proof risks of this service and you will need to evaluate it every single year.

 

*This probably sounds superfluous, but the author has seen many faulty examples of this in very large and smaller organisations.