What is Overhead?
‘What's overhead?' We hear you cry! Well, in accounting jargon, to define ‘overhead' is to refer to ongoing business expenses that aren’t related to labor costs, materials costs, or third-party expenses billed directly to customers (such as shipping costs).
Put simply; they are fees that aren't associated with the creation or production of your merchandise or services. Overhead is also sometimes known as ‘operating expenses'- so don't let that confuse you.
Typically, overhead costs are paid on an ongoing basis- whether the company's profiting or not. It's imperative to know the overhead costs of business so you can budget accordingly.
It's equally important to know your overhead costs to determine how much to charge for your products or services to make a profit. Some common overhead costs are rent, insurance costs, and utilities.
There are Three Kinds of Overhead Costs
In some cases, such as rent, overhead expenses are fixed. This means you're charged the same fee every month.
Whereas, other overheads are variable, such as electricity costs, which might be lower in the fall and spring, but higher during the summer or winter.
Finally, some overhead expenses are known as ‘semi-variable,' which means some part of the payment is incurred no matter what, while the other portion is dependent on business activity. For example, utility costs can be semi-variable if there's a base charge, and an activity charge based on usage.
Overheads for traditional brick and mortar business can be quite high, but e-commerce businesses are renown for being low overhead businesses. In some cases, the overhead can be as low as $0, but usually, there are a few small overhead costs. These might include hosting for a website or paid tools to assist in e-commerce marketing.
Other overhead examples include:
- Salaries that aren’t job or product related
- Office equipment
- Office supplies
Monitor Your Overheads
If you don't keep an eye on your overheads, it's easy for them to eat into your profits. Carefully monitor all your outgoings and weigh them against your income. If you're not great with numbers, consider hiring the services of an accountant.
Not only do accountants help you track your overheads, but they're also pros at finding ways to cut your expenses- things you'd never have considered yourself. Yes, these services might be a sizeable investment, but usually, it's one that pays off in the long run.
There's every chance you're not making the most of the tax benefits available to you. Needless to say, you want to utilize every government program and tax exemption you're eligible for. They're amazing for reducing your expenses and leaving with an overall low overhead.
Some of these tax breaks may apply in the followings scenarios:
- When you hire an untrained worker,
- When you improve your energy efficiency,
- When you use certain raw materials.
Tax break rules and regulations can be extremely complicated, so again we urge you to hire an expert.
On the subject of cutting down your overheads, we have a few other pieces of advice for you:
1. Go Paperless
Not only is going paperless amazing for the environment, but it's also great for cutting down your expenses. Plus, without tons of papers cluttering your office, you'll probably enjoy the benefits of a tidier workspace.
Instead of printing your files, try storing all your essential docs on a secure cloud system, back up your folders onto hard drives, and sign contracts with an e-signature. This omits the need and therefore the expense of paper, ink, and other printing costs.
2. Cancel Subscriptions You Don't Need
Scour your emails and look around your office and see whether you're paying for things you don't use. All too commonly we shell out for ‘cheap' subscriptions because we think they're a great deal, and then don't use them!
Does that sound like you? If so, cancel them- it's as simple as that.
3. Use Skype, Zoom, and Google Voice
By this we mean, usually there's no need for you to pay for expensive phone service. Instead, you can utilize:
- Google Voice,
With these Internet-based services, you don't have to pay for calls or voicemails- how awesome is that?
Other Handy Overhead Tips
We suggest factoring your overheads into the cost of producing and marketing each product. When you do this, you'll get a better idea of what to charge customers- and won't get caught out with any surprise bills!
This may sound obvious, but waste is the worst. Make it your aim to streamline operations to make them as efficient as possible. When you do this, you're bound to boost your bottom line.
For example, are there any energy saving strategies you can employ to save money? Do your staff need training, so they're able to make the most of their time? Can you use cheaper software?
You get the idea! These small changes all add up- after all, every little helps!
We hope you now have an answer to the question; ‘what does overhead mean?'
It’s near-on impossible to run a business without incurring overhead expenses. This is especially true if you're manufacturing your own products. The costs of infrastructure, warehousing, utilities, and wages can quickly eat away at your profits.
Therefore, learning to budget your overhead expenses is an essential part of creating and managing a profitable business. It's down to you as a business owner to minimize your overheads to maximize your profits. This means streamlining your operating expenses, so you don't pay more than is strictly necessary.