Fixed Costs

The fixed costs are those expenditures which must be incurred to keep the business running, even if there is no production or sales. Every company has a level of administrative cost, and some commitments to staff, space or services that form the cost base of the company.

For a highly volatile sales pattern, in general it is better to have low fixed costs and high variable costs, so that the profitability tracks more closely with sales. However variable costs often come at a premium (such as using contractors for development work, or renting workshop or warehouse space as you need it) so as volumes increase and stabilise, then costs can sometimes be decreased by making them less variable.

Employing permanent staff rather than contractors lowers the cost of delivering the work, but means that even if the work required reduces, the staff still get paid. Some businesses have a mix of permanent and contract staff, where contractors are only used during peak times.

Net profit (or net income) is the Gross Profit (income less cost of goods), less the fixed costs. EBITDA is a measure of net profit excludes taxes, depreciation and amortisation and reflects the ongoing profitability of a business over time. It is the most commonly used metric when making a valuation of a company.