There are two kinds of costs – variable and fixed. Variable costs are those that increase or decrease along with a specific activity. Fixed costs, on the other hand, are those that are incurred on a routine basis, regardless of business activity. For example, consider salaried employees versus commissioned salespeople. An employee on salary will be paid every month regardless of the performance of the business. This person’s salary is a fixed cost. Conversely, a salesperson paid 100% commission is a variable cost because he only gets paid when a sale is made.
Startups should always prefer variable costs to fixed costs. Hire independent sales reps instead of salaried employees. Work with a contract manufacturer instead of building your own manufacturing plant. Outsource billing, sales reports, inventory to an accountant instead of bringing on a salaried CFO. Hire a PR firm based on performance, not retainer.
If you run out of money you’re dead in the water. The fastest way to run out of money is to take on too many fixed costs. So develop a strong preference for variable costs when building your company. The secret of survival is to keep your overhead as low as possible, for as long as possible.
