Fixed And Non-Fixed (or indirect and direct)

Expenses come in two flavors, fixed and non-fixed. A fixed expense represents an expense that you will have to pay even if your business has no sales. Some fixed expenses are insurance, mortgage payments, loan payments, etc.. Non-fixed (or direct) expenses are moneys spent in direct support of sales. As you sell more, the expenses go up. Some examples are septage dumping fees, gasoline, tires, salary, etc.. The reason that the expenses are broken down in this way is to determine how much it costs to run your business.

Fixed costs are usually used to develop ratios such as fixed $/sales dollar, fixed $/labor hour, fixed $/pump, fixed $/service, etc.. The important aspect of these ratios is that they get smaller as your business activity increases (assumes no new equipment is needed to handle increase sales). This is why you can always get a discount when you buy in volume. The ratio of the fixed costs of running your business against any measure of business activity gets smaller as the volume increases, i.e., it costs less per service or pump the more pumping and services your company does.

Non-fixed, or direct, costs will increase with additional sales. It takes more gasoline, labor hours, etc. to do more pumping or to service additional units. Non-fixed or direct costs go up with increases in sales.

The reason you track expenses in this way is to see which ones are adding significantly to your costs and invest some time, money and energy to reducing them. The two categories of costs require different actions to keep them under control and one depends on the other, i.e., a new truck will lower your direct costs (reduced maintenance per mile) and also increase your fixed, or indirect, costs for new insurance, loan payments, etc.. Your accounting system gives you the numbers which enable you to develop a business case to see if you should spend the money for the truck.

The key to a successful accounting system is to assign your expenses to categories and most importantly, as expenses come in, make sure they are placed into the correct category.

Some sample expense categories you should consider are:

These categories are called a chart of accounts. In each account you estimate a budgeted amount you think you will spend, and the accounting system collects the actual. The comparison between actual and budgeted amounts gives you a dollar measure of how well you are running your business as compared to your plan (budgeted amount).

You can see that the list can grow rather quickly. It is important that with any accounting software you use, you can create sub accounts, i.e., material is the sum of pipe, stone and fittings. This will allow you to group small categories, yet still be able to break out details if needed.

A good accounting setup can be a valuable tool in managing a business. Using fixed and non-fixed costs, we segmented expenses into two groupings, but have not addressed sales, or revenue. In the next approach, we look at segmenting sources of revenue and some of the business benefits of doing this.