What are Business Costs?

The money a business must spend to make and sell things is called a cost. These costs occur constantly as the business runs. Understanding costs helps business owners determine how much money they need and how much to charge for their goods.

Fixed Costs

Fixed costs stay the same no matter how much a business makes or sells. Rent for a building is a fixed cost because the company pays the same amount each month. Other fixed costs are insurance payments, worker salaries, and loan payments.

Variable Costs

Variable costs change based on how much a business makes or sells. For example, the wood needed to make chairs is a variable cost. If the business makes more chairs, it needs more wood. If it makes fewer chairs, it needs less wood. Other variable costs are shipping fees, raw materials, and sales team payments.

Operating Costs

Operating costs are the regular expenses needed to keep a business running daily. These include things like power bills, office supplies, and worker wages. Operating costs can be either fixed or variable.

Direct Costs

Direct costs link straight to making one product or giving one service. For a bakery, flour used to make bread is a direct cost. The baker’s time spent making the bread is also a direct cost.

Indirect Costs

Indirect costs help the whole business but don’t link to just one product. The front desk worker’s wage is an indirect cost because they allow the entire company, not just one product. Building repairs and cleaning supplies are also indirect costs.

Overhead Costs

Overhead costs keep the business running but don’t directly help make products. The power bill for the office lights is overhead. The cost of the business phone line is also overhead. These costs happen even if the business isn’t making anything.

Sunk Costs

Sunk costs are past expenses that cannot be refunded. Money spent on old advertising is a sunk cost. Business owners should not consider sunk costs when making new choices because that money is already gone.

Time Costs

Time costs are about when the business must pay for things. Some costs need payment right away, like buying supplies. Other costs can wait, like paying bills at the end of the month. Knowing time costs helps businesses plan their money better.