In my experience and my research on how Modern Enterprises work, I noticed that some of the sharpest self-proclaimed ‘entrepreneurs‘ didn’t understand the difference between fixed and variable costs or what the general or specific cost structures were in their new business idea. As an individual, a new entrepreneur has to first manage their own fixed and variable costs before thinking about running a company. There are always fixed costs.
For me, the difference between Fixed and Variable costs is simple. Fixed costs need to be paid. Period. Variable costs are tied to revenue or return on investment related to the unit economics of the cost of “production” or delivery of “service.” In the case above, for the individual, each trip, job, or event could and should result in revenue. After all, why waste valuable time and effort. You should make enough profit from your variable cost investments to pay for your fixed costs.
- Rent – A entrepreneur has to live as comfortable as he or she can afford
- Food – A entrepreneur needs to eat healthy
- Transportation – A entrepreneur needs to get to the office, to his Clients’ or Partners’ office, or
- Communication – A entrepreneur needs to be able to answer phone calls and email people
- Insurance – A entrepreneur needs health insurance (depending on government regulations)
Individual Variable Operating Costs – Different for Different Industries
- Trips – A entrepreneur that travels for work needs to understand that each trip costs money
- Jobs – A entrepreneur that has several clients has several jobs and each job has a variable cost of time invested
- Events – A entrepreneur that gathers people at an event to promote their business needs to see each event as a cost
Beyond the core operating costs, you may need to spend some money in capital expenses as well. Each person is different and what you need really comes down to what you need to operate optimally.
Individual Capital Costs
- Equipment – Do you need a laptop , a phone, a standing desk?
- Knowledge – Do you need any books? Need to take any classes?
- Time – Do you have enough time (specially if you have a day job)
In the same way that an entrepreneur needs to manage their fixed and variable costs, they also need to do the same with their time. What are the activities that need to get done regardless? What are the activities that are related to production? You can read about organizing your new company’s People, Processes, Information, and Systems in upcoming articles and the book (in progress.)