Fixed cost
AccountingAlso called: Fixed vs variable cost
A cost that does not change with the volume produced or sold over the relevant range.
In plain terms
Rent, salaries and depreciation. They arrive whether forty customers come or four hundred.
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Glossary
Every term is defined twice: once the way a filing would put it, and once the way somebody would explain it to you across a table. The second one is usually the one that sticks.
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Barriers to exit
Fundamental analysisAlso called: Exit barriers
The costs and obligations that keep a participant producing even when it is unprofitable — single-purpose assets, high fixed costs, workforce and contractual obligations, and lenders who prefer a running asset to a distressed sale.
In plain terms
Everybody studies barriers to entry. Barriers to exit decide how deep a downturn gets and how many years it lasts, because loss-making capacity keeps running while it covers its cash costs.
Break-even
AccountingAlso called: Break-even point
The level of sales at which contribution exactly covers fixed costs and profit is nil.
In plain terms
The point past which a high-fixed-cost business becomes dramatically profitable, and below which it bleeds.
Contribution margin
AccountingRevenue minus variable costs — what each additional sale contributes towards fixed costs and profit.
In plain terms
The part of every extra rupee of sales that is actually left over to pay the rent.
Path to profitability
Fundamental analysisThe route by which a loss-making company is expected to reach profit, judged as two questions in order: does one customer make money, and can total contribution ever cover the fixed cost base?
In plain terms
A company can pass the first test and fail the second permanently. Positive unit economics with a cost base the addressable market cannot support is what catches people who stopped checking after the first question.
Operating leverage
Fundamental analysisAlso called: Degree of operating leverage, DOL
The degree to which a company’s profit changes for a given change in revenue, set by its ratio of fixed to variable costs.
In plain terms
The cinema versus the caterer. High fixed costs mean a 10% sales rise can be a 40% profit rise — and a 10% fall can be a warning.