Flexibility and nimbleness play an important role into sustainability, and the survival of a business when impacted by an economic shift, or other macroeconomic event that inevitably occurs from time to time. Keeping your cost a variable will allow you to make quick adjustments that can help you preserve cash, and to keep the doors open while revenue is down. During tough economic times many businesses fail, and further end up closing the doors because they run out of cash, and in most cases are not able to raise the additional capital required to keep going.
Variable costs fluctuate with revenue generating activity, such as labor, materials in the case of manufacturing, equipment repairs and maintenance, etc. If revenue in your business declines, you can expect that most of the variable cost will follow suit. Lower revenue will require lower labor, while the decline in demand for your product will not require the purchase of materials. Your equipment will get less wear and tear, and therefore will not require nearly the amount of maintenance that would be required when running at full capacity.
Fixed costs on the other hand are not as nimble as variable costs, given that changes in revenue will not impact fixed costs to the degree that it would impact variable costs. Real estate space, administrative staff, telephones, and utilities can run constant. Month-to-month renting of facilities vs. long-term leases is one way to keep this fixed expense a variable if you needed to change your venue, and preserve cash. Determining the amount that should be kept as a variable depends on your industry and how your business can be impacted by certain economic events.
At this point you should start seeing the importance of having cost act as a variable vs. having cost fixed, given that one offers more flexibility than the other. Granted there is businesses in certain industries that will not be allowed to keep their cost a variable, mainly manufacturing that require heavy investing in the purchase of facilities, as well as expense machinery. Regardless of your industry, labor for the most part can be a variable, unless it is administrative, in which case will act more as a fixed expense given that reducing your administrative department can have an adverse impact on your business.
A week economy often requires a reduction in cost overnight, and you cannot afford to have your business experience a reduction in revenue, while still maintaining the same expenses. Such a move will eat into your cash reserves, and without taking action can push your business into insolvency.