A fixed cost is one that your business incurs whether or not it makes any sales. An example is rent: It has to be paid every month whether or not you’re generating any income, and it’s the same every month.

A variable cost, by contrast, is incurred only when you make a sale. A variable cost usually varies depending on the amount of the sale. A commissioned salesperson, for example, is a variable cost. If the rep is paid 10 percent of sales, and the sales for a given month are $25,000, then that person gets $2,500 in commissions. If sales drop to $1,000, then the commission drops to $100.

Converting fixed to variable costs is a major way to reduce your need for money. It could also be the difference between success or failure for young companies. Every fixed cost should be scrutinized for conversion to a variable cost

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