Fixed Charges

Investment Dictionary -> Fixed Charges

The fixed charges or expenses are not related to the level of consumption of goods and services. The fixed expense stands for costs which do not fluctuate from one period to another or which change just negligibly. Fixed expenses are typically paid in a regular manner - week to week, month to month, quarter to quarter or year to year.

In small and medium businesses, fixed costs stand for the regular expenses that will not fluctuate with regard to production. Typicaly, the fixed expenses of small businesses cover charges for internet access, long-term rentals of equipment, and insurance policies.

Fixed expenses represent a major element of the overhead expenses of the firm. As mentioned, they do not fluctuate with changes in production or the sales volume. Other such factors are the rented facilities, insurance policies, dues, equipment leases, loan repayments, salaries for the executive level, and advertisements. Fixed costs do not vary with regard to production or sales volume, but they can change in time. As a result, fixed costs may be also referred to as period costs.

The fixed expenseses of corporations are typically regarded as the interest upon bonds, floating debts, and sinking funds. The sinking fund can be classified as insurance policies, rentals, and various taxes, related to the production capacity of the company and to its actual level of output. At times, the three items may be listed under a separate heading and excluded from the fixed expenses. The operating expenses of the company should cover them; otherwise, they are listed under fixed expenses. These charges may also include expenses fixed by agreements, such as pension fund contributions.

There is a large number of specialists who believe that in good periods, the companiesí fixed charges must not exceed more than fifty percent of the net earnings. This is important as to provide for decline in earnings in unfavorable time periods.

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