When planning for growth, most business owners focus on sales, marketing, and operations. But one of the most overlooked — and critical — elements of scaling successfully is understanding your cost structure, particularly the split between fixed and variable costs.
The cost structure of a business can significantly influence its profitability, scalability, and risk exposure. Let’s explore how.
Fixed vs. Variable Costs — What’s the Difference?
– Fixed Costs: These remain the same regardless of how much you sell. Examples include rent, salaries of permanent staff, and software subscriptions.
– Variable Costs: These fluctuate with output. Think of raw materials, hourly wages, or packaging — the more you sell, the more you spend.
How Cost Structure Affects Profitability and Growth
Below is a diagram that compares two growth scenarios: one where a business has high fixed costs, and another where the business has high variable costs.
Fixed Cost and Variable Cost
High Fixed Cost Model:
– Fixed costs stay relatively flat across the years.
– As sales grow, profits accelerate rapidly because the costs don’t grow at the same pace.
– Best suited for: scalable businesses with predictable growth (e.g., software companies, gyms, manufacturing).
– Risk: High exposure if sales underperform.
High Variable Cost Model:
– Costs rise in tandem with sales.
– Profits grow more slowly and steadily, with fewer dramatic spikes.
– Best suited for: service-based or freelance businesses, where output closely tracks demand.
– Risk: Lower financial pressure but also lower margin upside.
Why You Need Visibility of Your Cost Structure
Understanding what proportion of your costs are fixed vs. variable — and the percentages of each — gives you strategic clarity:
| Cost Type | Ideal for… | Risk Profile |
| High Fixed | Scaling quickly | High break-even threshold |
| High Variable | Uncertain or seasonal sales | Lower profit upside |
| Balanced Mix | Stable, measured growth | Moderate risk & reward |
Knowing your cost mix helps with:
– Pricing decisions
– Investment planning
– Break-even analysis
– Stress testing your business model
Aligning Cost Structure to Growth Strategy
Before embarking on a growth plan, ask yourself:
– What percentage of my cost base is fixed?
– Can my current revenue cover my fixed costs?
– Will scaling sales result in proportionate cost increases?
– What happens to my profits if sales plateau?
For example, a business with 70% fixed costs may experience explosive profit growth beyond a certain threshold. But in low-sales months, those same costs can become a burden.
Mitigating Risk Through Cost Awareness
– Model scenarios: Use financial forecasts to simulate what happens at different sales levels.
– Negotiate flexibility: Shift fixed costs to variable where possible (e.g., outsourcing instead of hiring).
– Track consistently: Reassess your cost mix quarterly to reflect changes in strategy or operations.
Final Thought
Growth isn’t just about increasing revenue — it’s about growing smartly. That starts with visibility. By understanding your cost structure and balancing fixed and variable expenses, you gain control, reduce risk, and build a business that scales profitably.
Need help analysing your cost structure or modelling future growth? At AJN Accountants, we work closely with business owners to uncover cost dynamics and align financial strategies with growth ambitions. Let’s talk.
