Fixed cost vs. variable cost: where to cut first?

When cash gets tight, the first reaction is to cut costs. But cut what? Not all costs are equal, and cutting in the wrong place can do more damage than it saves.

The fundamental difference:

Fixed costs exist with or without sales. Rent, salaries, accountant, internet, monthly software. If you sell nothing this month, they're still there.

Variable costs only exist when there's a sale. Materials, commissions, card processing fees, taxes on revenue, shipping. No sale, no variable cost.

Where to cut first?

It depends on which is putting more pressure. But the logic is:

High fixed costs = high risk. If your fixed costs are $20,000 and revenue drops to $18,000, you're in the red even while selling. High fixed costs require a high minimum revenue. It's the number that doesn't forgive.

High variable costs = low margin. If for every $100 that comes in, $70 goes to variable costs, you're left with $30 to cover fixed costs and generate profit. A 30% margin with high fixed costs is a recipe for disaster.

The practical rule:

1. 1If you're in the red: start with fixed costs. Renegotiate rent. Cancel software you don't use. Review whether your team is proportional to your revenue. Fixed costs are what pull you down when the tide goes out.

1. 1If you're breaking even: look at variable costs. Card processing fees can be renegotiated. Commission structures can be redesigned. Suppliers may offer better terms at volume. Every percentage point in variable costs increases the margin on everything you sell.

1. 1If you're profitable but want to improve: look at both. Fixed costs that generate no value are dead weight. Variable costs that can be optimized are hidden margin.

What NOT to cut:

Don't cut what directly generates revenue. Letting go of the salesperson responsible for 40% of your billing to save on salary is the most expensive economy there is. Don't cancel the tool that allows you to serve more clients. Don't reduce quality to save a few cents.

And most importantly: cutting costs is not the end goal — it's the means. The money saved needs to go somewhere that generates a return. Renegotiated rent and saved $2,000? Invest it in customer acquisition, product improvement, something that generates revenue. Cutting without reallocating is just delaying the problem.

Cutting costs is a scalpel decision, not an axe decision.

Know exactly what your fixed and variable costs are. The Calculadora de Preços separates the two and shows the impact on your margin. No sign-up required.