When it comes to business growth, managers often focus on sales, marketing, customer acquisition and expanding operations. Although these factors are essential, another aspect has a direct impact on a business’s financial health: the way costs are managed. After all, increasing turnover is important, but protecting margins and improving operational efficiency are what turn revenue into results. 

In this context, a common question among business owners and finance managers is which type of expenditure poses the greater risk or places the greater burden on the budget: fixed costs or variable costs. The answer may seem straightforward at first, but the reality is more complex. Depending on the sector, business model and stage of growth, both can have a significant influence on profitability. 

The truth is that the problem rarely lies in a single category of expenditure. What really determines an organisation’s financial health is its ability to understand, control and plan for each type of cost. Companies with an in-depth understanding of their cost structure tend to make better decisions, cope more effectively with periods of instability and grow more sustainably. 

So, before asking which weighs more heavily, it is important to understand exactly what fixed and variable costs are, how they affect operations and which strategies can be used to manage them intelligently. 

What are fixed costs? 

Fixed costs are expenses that remain relatively stable regardless of a company’s sales or production volume. In other words, they continue to exist even during periods of reduced activity. 

Imagine a company that sells 1,000 products in one month and only 500 the following month. Some expenses will remain virtually unchanged, regardless of this variation. These are precisely the expenses that fall into the fixed-cost category. 

The most common examples include: 

• Rent for the premises; 

• Administrative salaries; 

• Accountancy fees; 

• Software subscriptions; 

• Business insurance; 

• Internet and telephone services; 

• Recurring maintenance contracts. 

The main characteristic of these costs is predictability. Managers usually know in advance how much they will need to spend each month to cover these expenses. This makes budgeting and financial planning easier. 

However, this does not mean that fixed costs are harmless. Quite the opposite. When they become excessively high relative to business revenue, they reduce the company’s financial flexibility and increase its vulnerability during economic downturns. 

For this reason, continuously monitoring fixed costs remains one of the central responsibilities of financial management. 

What are variable costs?

Variable costs are those that rise or fall according to a company’s level of activity. Unlike fixed costs, they are directly linked to operations. The higher the level of production, sales or service delivery, the higher their value tends to be. 

Examples include: 

• Raw materials; 

• Packaging; 

• Freight; 

• Sales commissions; 

• Transaction fees; 

• Production inputs; 

• Part of the energy consumption in certain operations. 

This characteristic makes variable costs harder to predict with complete accuracy. If sales rise beyond expectations, the associated costs usually follow that growth. If demand falls, these expenses tend to decrease. 

At first glance, this may seem positive, as costs track revenue generation. However, there is an important challenge: without adequate control, variable costs can grow faster than turnover, undermining the company’s margins. This is precisely why managing them requires continuous monitoring and reliable indicators. 

So, which weigh more heavily on SME budgets? 

The question seems straightforward, but the correct answer is: it depends on the company’s structure. In service businesses, fixed costs frequently account for the largest share of expenditure. Offices, consultancies, marketing agencies and technology companies tend to concentrate much of their spending on salaries, rent and recurring contracts. 

In industrial, retail or logistics operations, by contrast, variable costs can play a much more significant role. In these cases, raw materials, transport, storage and energy consumption tend to account for substantial shares of the budget. 

What really sets financially healthy companies apart is not necessarily the weight of fixed or variable costs. It is the ability to control both in a balanced way. 

A company with high fixed costs can operate sustainably if it has consistent and predictable revenue. Similarly, an organisation with few fixed costs can face difficulties if it cannot control the growth of variable expenses. So the more strategic question is not “which weighs more heavily?”, but rather “which is receiving less attention from management?”. 

How to build an effective budget for fixed costs

Managing fixed costs starts with organisation. The first step is to map every single recurring expense in the company. Many organisations know their main expenses but fail to monitor smaller ones that, added together over time, amount to significant sums. 

Once these have been identified, it is important to classify costs by category and determine which are essential to operations and which can be renegotiated, replaced or eliminated. 

Another recommended practice is to review contracts regularly. Technology, telecommunications, maintenance and rental services frequently offer opportunities for optimisation that go unnoticed because they are not monitored. 

In addition, companies that use medium- and long-term financial projections can anticipate contractual price adjustments and plan their growth with greater confidence. The more predictable fixed costs are, the better financial decisions tend to be. 

How to control variable costs without compromising growth 

Controlling variable costs requires a different approach. Here, the focus is not just on reducing expenditure, but primarily on operational efficiency. The aim is to ensure that growth in expenses is matched by the value generated for the business. 

One widely used tool is monitoring the cost per unit produced, sold or served. This indicator makes it possible to identify deviations quickly and understand whether rising costs are being matched by proportionate revenue gains. 

It is also essential to monitor productivity, waste and resource consumption indicators. In many cases, small process improvements have a significant financial impact when replicated on a large scale. 

Another important point is to avoid decisions based solely on the absolute value of expenses. Variable costs are part of business growth. What matters is understanding whether they are growing in a healthy and sustainable way. 

Even variable costs need predictability

A common mistake among managers is to believe that variable costs are, by definition, unpredictable. Although they do fluctuate according to business activity, this does not mean they should be treated as expenses that are entirely beyond control. 

In reality, sound financial management seeks to minimise the uncertainty associated with these costs. The greater the predictability, the better the company’s ability to draw up budgets and make strategic decisions. 

Consider a company that relies heavily on transport. Although logistics expenditure is variable, managers need to build scenarios that can estimate how it will behave over the months ahead. 

The same logic applies to electricity. Even though it is an expense linked to consumption, its predictability directly influences the organisation’s ability to plan its finances. This is precisely why so many companies have been seeking solutions that can reduce fluctuations and improve the stability of energy costs. 

Why is electricity one of the most challenging variable costs? 

Electricity has a distinctive characteristic within a company’s financial structure. On the one hand, it behaves as a variable cost, as it usually follows the level of operational activity. A busier supermarket, a factory producing on a larger scale or a logistics centre handling higher volumes tends to consume more energy. 

On the other hand, external factors also influence the final bill. Tariff adjustments, regulatory changes and tariff flags can affect costs even when consumption remains relatively stable. This makes financial projections more difficult and increases the need for continuous monitoring. 

In many businesses, energy is not just another operating expense. It is a strategic input that directly influences the company’s competitiveness. For this reason, achieving greater energy cost predictability has become an important objective for finance managers in small and medium-sized enterprises. 

How NewSun’s clean energy subscription turns a variable expense into a more predictable cost

One way to improve financial predictability is to reduce the volatility of expenses that are significant to operations. In this context, a clean energy subscription from NewSun offers an attractive alternative for companies looking to modernise their energy management without investing in infrastructure. 

The model allows companies to participate in a solution based on distributed generation without having to install solar panels, purchase equipment or carry out building work. The electricity distributor continues to supply power as normal, and operations carry on without interruption. 

In addition, the subscription helps make an expense traditionally influenced by a range of external factors more predictable. By participating in this model, the company reduces its exposure to the impact of tariff flags on the offset portion of its electricity and gains a more stable cost structure. 

In practice, this means turning a traditionally variable expense into a much more predictable cost, making budgeting, financial projections and investment decisions easier. 

Another important advantage is simplicity. With no equipment of its own to install or maintain, the company can focus its financial and operational resources on its core business. 

The balance between fixed and variable costs determines financial efficiency 

Financially mature companies do not treat fixed and variable costs as adversaries. They understand that both play important roles within the operational structure. Fixed costs provide stability and keep the business running.  

Variable costs, meanwhile, allow operations to grow and adapt to market changes. 

The key lies in achieving a balance. Excessive fixed costs reduce flexibility. Uncontrolled variable costs undermine profitability. The right combination of the two strengthens the organisation’s financial health. In addition, modern managers seek to improve predictability wherever possible. 

 The less uncertainty there is around expenses, the greater the ability to plan for the future with confidence. This is why topics such as energy management, financial automation and indicator monitoring are gaining ground in the strategies of small and medium-sized enterprises. 

Conclusion 

There is no single answer to the debate over fixed and variable costs that applies to every business. Depending on the sector, operating model and stage of development, either can play a dominant role in the financial structure. 

What really sets resilient companies apart is the ability to understand their costs in depth, monitor indicators and turn unpredictable expenses into more manageable expenditure. 

In this context, predictability becomes a strategic asset. This applies both to fixed costs and to traditionally variable expenses such as electricity. 

Companies that make their costs more predictable make better-informed decisions, plan their investments more effectively and build stronger foundations for sustainable growth. In a competitive environment, this capability can be just as valuable an advantage as increasing sales or winning new customers.