What are fixed costs?

Fixed costs are best defined as costs that do not change with the level of production or sales. This means that regardless of how much a company produces or sells, these costs remain constant over a certain period. Typical examples of fixed costs include rent, salaries, insurance, and equipment leases. These expenses are usually incurred on a regular basis and must be paid irrespective of the business's output, which makes them fundamental for budgeting and financial planning.

Understanding the nature of fixed costs is crucial for entrepreneurs as it helps in forecasting financial performance and assessing profitability. Since fixed costs remain unchanged, the focus for managing these expenses can shift toward optimizing other areas, such as variable costs, to improve overall financial efficiency.