Corporate Finance – Business Costs

One of the most important factors to take into consideration when running a business is that, no matter what you do or how you run the business, there will always be costs involved. Even businesses which are run over the internet have initial costs which have to be covered.

Costs come in all shapes and sizes and can appear anywhere within the business, but there is one place which they all appear on: the profit and loss account at the end of each month. The three main types of costs are Fixed, Variable and Total costs, and this is not so much simple figure, but a simple equation which has to be worked out in order for the total for the fixed and variable costs to be discovered. For this example we will use an internet cafe as an example, but it can apply to all businesses.

Fixed costs are the costs which, no matter how well the business does, stay the same for the long term. It’s not impossible for these costs to fluctuate, but unless something changes then these costs should remain the same; if in the there is a change to affect a fixed cost then the cost will remain at the new price until the next change. An example of a fixed cost would be rent which the business owner has to pay on premises; this will remain the same unless the land lord changes the cost the tenant has to pay for the land. Another example would be line rental. A company will generally set how much telephone line rental will be and the customer just pays the same amount monthly, again unless the company makes a change to how much the line rental costs.

In comparison to fixed costs, there are variable costs. These are affected by the performance of the business, in that if more people use it then the costs will go up and visa-versa. An example of a variable cost would be ingredients for the food and beverages: if customers really enjoy the new flavour of coffee, then the price which the business has to pay to be able to meet the customer needs is increased in order to keep up with demand for the new drink. Variable costs are called overheads.

And finally Total Costs are the Fixed + Variable Costs every month, and if this totals more than income earned, then you need to review your business, as the ideal situation is breaking even, or hopefully making a profit each month.