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On the measurement of Portuguese firms’ fixed operating costs

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A firm’s fixed operating cost is usually defined as a cost that does not change with its sales. These costs affect the firms’ capacity to weather adverse shocks. However, a firm may have substantial fixed costs and still have the flexibility to reduce them at a low cost and in a relatively short time period. In this article we take the firms’ flexibility into account and estimate fixed operating costs as the expected operating costs next year if sales were zero. We estimate fixed operating costs at the firm level for the period between 2006 and 2018, exploring the heterogeneity by firm size and sector of economic activity. The estimates show that on average fixed operating costs of Portuguese firms account for approximately 15% of their sales.We document two main findings. First, the fixed operating costs to sales ratio of smaller firms is higher than that of larger firms. Second, this ratio is higher in sectors of economic activity related to services. These results are linked to the operating costs structure of firms, namely the share of employee expenses, costs of goods sold, and supplies and external services on total operating costs.
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