Welcome to today’s Tiny MBA topic: fixed costs.
Definition: Fixed Costs
Fixed costs are things you buy once for your business, and then use for a long time. Their cost doesn’t usually change depending how much business you do.
Examples: Fixed Costs and Backyard Businesses
Say your parents let you take over the backyard to do a business, like a bike repair shop or a chicken coop selling eggs. You’ll need to spend some money to get set up, buying equipment for your business that will last a long time.
For bike repair, you’ll need a whole lot of tools, and maybe a bike stand. Possibly also an air compressor for filling up tires. These are fixed costs: costs that won’t change no matter how many bikes you repair.
For the chicken coop, your biggest cost will be the coop itself – this could be hundreds or even thousands of dollars, depending how big and fancy it is. You’ll also need a brooder: an enclosure to keep the baby chicks warm. You need to buy these things no matter how many eggs you sell… that’s why they’re called ‘fixed’ costs.
The big question with fixed costs is whether they’re going to be worth it… will you repair enough bikes, or sell enough eggs, to justify how much you spent on that fancy bike stand or amazing chicken coop? Or should you have gotten a smaller/cheaper one (or an even bigger one)?
So think hard about your fixed costs (and do lots of research) when setting up your business – especially because you’ll probably have to borrow the money for them. These up-front decisions can have a big impact on whether your business succeeds.
Related reading: Variable Costs and Lemonade Stands.
Tiny MBA is my occasional series of short stories illustrating business concepts for kids.