What are fixed costs?
Fixed costs are expenses that do not vary with output or sales volume in the short run — rent, salaries of permanent staff, depreciation of long-lived assets, software subscriptions, insurance. They are incurred regardless of whether the business sold one unit or one million in the period.
Fixed costs vs. variable costs
- Fixed: stay constant in total within the relevant range; per-unit cost falls as volume rises (economies of scale).
- Variable: rise and fall directly with output; per-unit cost is roughly constant.
- Semi-variable: have both components — a sales-team manager’s salary plus commission.
- Step-fixed: stay flat over a range, then jump (a new office floor or another factory shift).
Fixed costs in SaaS
Software businesses are fixed-cost-heavy: engineering salaries, infrastructure, security, compliance. The fixed-cost-to-revenue ratio drives the operating leverage profile. A SaaS at 5% fixed-cost-to-revenue scales operating margin rapidly; at 80% it cannot reach profitability without dramatic revenue growth.
Strategic implications
- Operating leverage: high fixed cost amplifies returns above break-even and amplifies losses below it.
- Cash-burn discipline: the budgeted fixed-cost base sets the floor for monthly cash burn — non-negotiable until the next round.
- Hiring as commitment: headcount creates fixed cost; reversing it (layoffs) is operationally painful and reputationally costly.
- Lease commitments under IFRS 16: long-term office leases sit on the balance sheet as right-of-use assets and lease liabilities.
Do: categorise every operating expense as fixed, variable or step-fixed in your model; track the fixed-cost base as a single board KPI.
Don’t: grow fixed costs ahead of validated revenue — the burn doesn’t shrink when revenue disappoints, and the runway shortens fast.