There's a question most SME managers cannot answer on the spot: how much does the company have to invoice each month just to cover the costs that exist no matter what? Without that number, hiring and pricing decisions get made in the dark.
The split, in practice
Fixed costs exist regardless of volume: core salaries, rent, insurance, software, accounting, communications.
Variable costs track volume: materials, subcontracting, commissions, transport.
There are always borderline items. The practical rule that resolves most of them: if the company sells nothing for a month, does that cost still exist? If yes, it's fixed.
Watch out for the most common mistake: permanent staff are a fixed cost, even when the activity is seasonal. Treating them as variable is at the root of many poorly calculated hiring decisions.
The break-even point
With the split done, calculate the contribution margin: revenue minus variable costs, as a percentage. A company invoicing €100,000 a month with €40,000 in variable costs has a 60% contribution margin.
If fixed costs run €45,000 a month, the break-even point is 45,000 ÷ 0.60 = €75,000 in monthly revenue. Below that, the company loses money; above it, every additional euro contributes 60 cents to the result.
This number changes conversations. You can now say "this hire, costing €2,000 a month in total, needs €3,300 in additional monthly revenue to pay for itself" — a far more useful sentence than "I think we can manage it."
Where this changes decisions
- Accepting or turning down below-rate work. If overhead is already covered by the rest of the activity, work with a positive contribution margin improves the result, even below the usual price. If overhead isn't covered yet, it doesn't.
- Hiring. Every hire permanently raises the break-even point. Know by how much before deciding.
- Investing in automation. This typically swaps variable cost for fixed cost: it improves margin and raises risk in weak months.
The warning
Below-rate work is fine occasionally and destructive as a habit. Once it grows into a meaningful share of the client base, overhead stops being covered and the maths flips against the company.
This is one of the cases where the margin per client analysis should be done before renewing, not after the pattern has already settled in.