The relationship between fixed and variable costs determines whether a company is viable. Here is an explanation and some advice.
Fixed costs and variable costs are the basis for formulating a business calculation. They show whether a company is profitable or not. In the long or short term, it is pointless to manage a busy company that posts good turnover if the company is not covering its costs.
The entrepreneur therefore needs to know on which products or services he/she wants to make a profit and those which will make a loss. To determine this, you will need to calculate the margin on variable cost.
Fixed costs are permanent costs, no matter how much the company produces and makes in profit. Fixed costs include, for example, rent, monthly leasing costs, insurance premiums and electricity and heating costs.
Variable costs, on the other hand, depend entirely on manufacturing and merchandise or provision of services. Variable costs include, amongst others, buying merchandise, transport and customs costs and electricity costs during manufacturing.
Simplified calculation
To calculate the variable cost margin, all you need to do is subtract variable costs from turnover. The remaining amount can be used to help cover the company’s fixed costs. If the fixed costs amount to 30% of total costs, the variable cost margin should also correspond to 30%. If this is not the case, the company makes a loss, or it should reduce these costs by cross-financing with more profitable products. If the variable cost margin is higher, it will generate profit.
You can find out about the average variable cost margin from associations in the sector and then calculate the minimum turnover that you will need to achieve. If the costs are roughly 30%, as per the previous example, and correspond, in the company, to CHF 60,000, a turnover of at least CHF 200,000 will be needed to cover the costs.
