Level 6 · Financial Analysis
Expenses
Fixed or variable, the answer decides how a company survives a bad year.
In this lesson
What you'll be able to do
- Separate fixed from variable costs
- Read the expense lines in a P&L
- Explain operating leverage simply
- Spot costs rising faster than revenue
Think about it
Two companies lose half their sales overnight. One survives comfortably, the other nearly shuts. What's different?
Story
Let's picture it
A cloud kitchen and a fine-dining restaurant both lose 50% of customers. The cloud kitchen buys less raw material and simply spends less. The restaurant still pays rent for a large hall, salaries for waiters and electricity for the lights. Same fall in sales, very different pain, because one had mostly variable costs and the other mostly fixed.
Visual
Fixed vs variable
Fixed costs
Rent, salaries, depreciation, interest, paid whether you sell or not
Variable costs
Raw material, packaging, freight, rise and fall with sales
High fixed
Profits explode in good years, collapse in bad ones
High variable
Steadier, lower-risk margins across the cycle
Plain English
The simple explanation
Open any P&L and you'll see cost of materials, employee benefits, finance costs, depreciation and 'other expenses'. Your job is to classify each as mostly fixed or mostly variable.
This mix creates operating leverage. A company with heavy fixed costs turns each extra rupee of sales into a lot of extra profit, and each lost rupee into a lot of lost profit.
The single most useful check: is any expense line growing faster than revenue for several years? That is where margin quietly disappears.
Real world
Indian airlines
Airlines carry huge fixed costs, aircraft leases, crew, airport charges, plus fuel that moves with global prices. That is why the same airline can post large profits in a strong quarter and heavy losses in a weak one.
Watch out
Common mistakes
- Looking only at total costs instead of each line's trend.
- Ignoring finance costs when debt is rising.
- Assuming cost cuts are always good, some cut future growth.
Did you know?
'Other expenses' can be one of the largest lines in an Indian P&L; the notes to accounts break it down, and that breakdown often contains surprises.
Your turn
Mini challenge
Take one company's P&L and calculate each major expense as a percentage of revenue for three years. Which line moved most?
Quick quiz
1 / 5
Wrap up
Summary
Classify every expense as fixed or variable, track each as a percentage of revenue over years, and watch for any line growing faster than sales.
- Fixed costs amplify good and bad years
- Track expenses as % of revenue
- Operating leverage explains profit swings
- Notes to accounts explain big cost lines
Revise