Although not the most exciting subject – okay, way down the list of exciting subjects – understanding the difference between fixed costs and variable costs is actually quite important when budgeting your business and deciding what to charge for your services. I know there are many great resources out there from accountants and other financial experts with more detailed definitions and articles in regards to the difference between the two, but I thought covering the basics and stressing the importance would be helpful as wedding season kicks into full gear.
A fixed cost is anything your business pays for that is independent of the number of bookings you have. An easy example would be rent, since you pay the same amount for rent whether you have no bookings or 1000 bookings. Thus, when budgeting, you divide your fixed costs into the expected number of bookings. For example, if the rent on your business location is $1500 per month and you expect to have 15 bookings per month, the cost per booking for rent is $100. Other standard examples of fixed costs are equipment, utilities, and business fees (e.g. licenses).
A variable cost, on the other hand, is anything your business pays for that is purchased for a specific booking. An example for a florist would be the flowers specific to a certain couple. Other standard examples would be the food bought by a caterer for one particular event, or the Sand Ceremony kit bought by an Officiant for a specific ceremony, or staff paid by you to help on that one wedding.
Of course, because things can’t be too simple, there are some costs that in true accounting terms, and in much larger businesses than most of ours, can be either one or the other, or both, such as marketing dollars. If you have an accountant, you can always ask, and if no accountant, my personal recommendation is to put marketing and other costs you are not sure of into fixed costs and divide out over the number of bookings. The important thing to understand is that in service businesses such as ours, having an accurate idea of your expected cost per booking is very critical because: it allows you to decide how much you need to charge for your services, gives you an idea of how much you can discount (if you discount), and allows you to better value everything you purchase or sign up for in the running of your business.