## Fixed Costs and Variable Costs: Entrepreneurs Need to Know This!

Came across a great business proposal but still don’t understand fixed costs and variable costs (Fik Kos)? Successful entrepreneurs must have a deep understanding of this because if you don’t know where your money is going, it will be difficult to control profits. This article will explain simply what fixed costs and variable costs are, why they are important, and how to leverage them.

## What Are Fixed Costs? A Basic Introduction

The two words: **Fixed Costs (Fixed Cost)**, also called **Fik Kos**, refer to money that a business must pay every month or year regardless of how much you sell or produce.

Typically, fixed costs are expenses that must be paid whether your business is operating or not. For example, office rent must be paid monthly even if there is no income that month.

###Common Examples of Fixed Costs

- **Land and building rent** - Office, warehouse, factory rent paid monthly
- **Employee salaries** - Fixed salaries of permanent staff, unchanged by sales volume
- **Insurance** - Business insurance, building insurance, vehicle insurance, etc.
- **Equipment and machinery** - Depreciation or maintenance costs
- **Loan interest** - If you borrow money, you must pay interest monthly whether you profit or not
- **Licenses and others** - Renewal fees for business licenses, permits

###Why Are Fixed Costs Important?

If you don’t know your business’s fixed costs, you might plan incorrectly because these costs must be paid regardless of income. Knowing and calculating fixed costs helps you:

- Set the correct price for products/services (Price must be high enough to cover fixed costs)
- Plan finances more effectively
- Calculate the break-even point (Break-even point), so you know how many units to sell to avoid losses

## What Are Variable Costs?

Unlike fixed costs, which remain constant, **Variable Costs (Variable Cost)** are expenses that increase when your business produces or sells more.

Simply put: the more you sell, the higher the variable costs; the less you sell, the lower the variable costs.

###Common Examples of Variable Costs

- **Raw materials** - Producing 100 units requires buying 100 units of raw materials; producing 1,000 units requires 1,000 units of raw materials
- **Direct labor** - Workers involved in production; increasing production requires more workers
- **Energy and water** - More production consumes more electricity and water
- **Packaging** - Selling 100 units requires 100 packaging units
- **Shipping costs** - More products to deliver mean higher shipping costs
- **Sales commissions** - Payments to sales staff or agents based on sales volume

###Why Should You Care About Variable Costs?

- Helps you set accurate prices
- Assists in production planning by knowing how costs increase with output
- Aids decision-making on whether to expand the business (because you’ll know how much extra money will be spent)

## Comparison: Fixed Costs vs. Variable Costs

| Feature | Fixed Costs | Variable Costs |
|--------|--------------|----------------|
| **Change** | Do not change | Change according to volume |
| **Examples** | Rent, salaries | Raw materials, shipping |
| **When sales increase** | Remain the same | Increase |
| **When sales decrease** | Remain the same | Decrease |
| **Importance** | Must know for planning | Must know for pricing |

## Leveraging the Understanding of Both Costs

### 1. Setting Appropriate Product Prices

You need to add a margin to your price to cover fixed costs. For example, if the variable cost per unit is 50 THB, fixed costs to cover are 10,000 THB/month, and you expect to sell 500 units/month, you need to add 20 THB per unit (10,000 ÷ 500). Therefore, the minimum selling price should be 70 THB.

### 2. Planning Production and Sales

Once you know your costs, you’ll know how many units you need to sell to break even (Break-even point). From the example above, you need to sell at least 500 units per month to be profitable.

### 3. Making Investment Decisions

If considering investing in new machinery (which will increase fixed costs) but help reduce variable costs, you must calculate whether this investment is worthwhile.

### 4. Systematic Cost Control

Knowing which costs are fixed and which are variable allows you to identify where to cut costs, such as reducing variable costs by purchasing cheaper raw materials or decreasing fixed costs by downsizing your office.

## Summary

**Fixed Costs (Fixed Cost) and Variable Costs (Variable Cost)** are both crucial for business operations. Successful entrepreneurs are not just those with good products but those who deeply understand costs (Fik Kos).

Knowing costs helps you:
- Set accurate prices
- Plan finances sharply
- Make better investment decisions
- Control profits effectively

So, take some time to calculate your business costs, distinguish between fixed and variable expenses. Once you understand this, your business will become stronger for sure.