The Problem With Fixed Costs

In business there are three primary types of costs: variable, fixed, and primary sunk investments. Taking on too much of any category can quickly become a problem, as we are finding out in this country.

Variable costs are exactly what they sound like - variable. These costs are only incurred when you sell something, and they vary in a direct relationship with sales.

Primary Sunk Investments are large investments in something that is primary to the way you do business. A factory would be a good example of this type of investment.

Fixed Period Costs are costs that you incur regardless of sales. Think of rent, or salaries. These expenses are there every month even if sales go down. These are the expenses that make slow times very hard, and these are the expenses we seem to be taking on more and more as a country. Here are a few examples:

• Debt Payments - these must be made on the agreed upon schedule
• Social Security - these checks have been promised to citizens
• Government Salaries - more government jobs equals more salary expense

High fixed period costs kill you the instant your revenue (or inflow of cash) slows down. This is the problem suburban families who are in a lot of debt with car and house payments have when they lose their jobs. The payments are still due, but there aren't any savings to fall back on because they have been living too close to the edge for so long.

Similarly, the U.S. government has no savings. We are in debt up to our ears. So any proposal to take on more fixed period costs, such as health care administration or extra workers, should be voted down almost immediately. We simply don't have the cash to pay for it.