If revenue is the money coming in, expenses are the money consumed to earn it. But not all costs behave the same way — and understanding how they behave is what tells you how a business will react when sales change.
Three families of cost
| Type of cost | What it means | Examples |
|---|---|---|
| Variable | Rises and falls with sales volume | Raw materials, packaging, freight, sales commission |
| Fixed | Stays broadly the same regardless of volume | Factory rent, plant depreciation, salaried staff |
| One-off (exceptional) | A cost that should not repeat | Restructuring, a lawsuit settlement, an asset write-down |
On the income statement, the direct costs of what was sold are usually called cost of goods (or cost of services), and everything else in the ordinary running of the business is grouped as operating expenses.
Why the mix matters: operating leverage
A business with mostly variable costs sees profits move roughly in step with sales. A business with high fixed costs sees profits move much more sharply: once the fixed base is covered, each extra sale drops more profit to the bottom line — but a fall in sales hurts just as forcefully.
- High fixed costs
- Profits are volatile. Airlines, steel plants and hotels behave like this.
- Mostly variable costs
- Profits are steadier. Trading and distribution businesses often behave like this.
Build an income statement
Change any input and watch the whole statement — and every margin — recalculate.
| Line item | ₹ crore |
|---|---|
| Revenue | 1,000 |
| Cost of goods / services | -400 |
| Gross profitRevenue − COGS | 600 |
| Operating expenses | -200 |
| EBITDAGross profit − Opex | 400 |
| Depreciation & amortisation | -100 |
| EBIT (operating profit)EBITDA − D&A | 300 |
| Interest | -50 |
| Profit before tax | 250 |
| Tax @ 25% | -62.5 |
| Net profit | 187.5 |
Gross margin
60%
EBITDA margin
40%
Operating margin
30%
Net margin
18.8%
Watch the exceptional items