Why are fixed costs important for businesses to manage effectively?

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Fixed costs must be managed in any organization because they represent one of the most significant financial factors in the enterprise. Such costs are those that have to be covered regardless of the volumes of products sold or units produced hence are borne right on the break even point.

Management should be able to keenly balance on these costs in a way that does not financially strain a firm while performing its core functions. For example, a business may need cheaper rental terms than it originally had, or maybe combine offices to cut their rental costs. Fixed costs also help discover the certainty, which is suitable for strategic planning.

Where it is not controlled properly such costs may limit the ability to generate positive cash flows due to setbacks such as poor sales performances during a particular type of seasons or economic meltdown. When fixed costs are low, companies benefit from the favorable position as they can quickly and easily manage strains on profitability.

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