What is Overhead and How Much Does it Cost Businesses?
If you own a business, you have overhead costs. Whether you’re the sole freelancer that uses just a monthly subscription to Canva for creating graphics or the owner of a booming business that manages payroll for 50 plus personnel. And, as we all know, for any business to be truly successful, it has to take account of overhead costs to measure whether it is meeting financial goals or not. Might I remind our readers, from our previous blog posts, that just because a business has income, doesn’t mean it is profitable. Read on to hone in on what overhead is and how much it costs businesses so that your bottom line is always in tip-top condition.
What is an example of overhead costs?
There are plenty of examples of overhead costs and they can add up quickly. Of course, this will vary between businesses but there are some common overhead costs that we can cover here for the sake of understanding what your business’ overhead costs are.
In fact, just earlier this week, I was performing my usual responsibilities as a Virtual CFO for a local client. As we were discussing her financial statements and building forecasts for her company in the future, I was highlighting areas we should focus on. As I was providing details, she was noticing many fees that she hadn’t accounted for in her retail price to support the overall cost of daily operations. Shining a light on the credit card processing fees, bank fees, accounting fees, marketing fees, insurance, payroll processing fees and more came as an eye-opening awareness when laid out in front of her. Right then and there, the lightbulb went on. The realization that she needs to account for overhead in her retail price.
The above fees are just the tip of the iceberg. There are also subscription fees for the many platforms your business is using to run day-to-day operations. Think email via G-suite, invoicing via QuickBooks, social media management via Hootsuite and similar.
Essentially, overhead is the cost of doing business. We see this often with our employees-turned-employers. Once an employee, the assumption may have been that aside from payroll and maybe a lease for a location, profit was just that. New entrepreneurs may not have a lens into the perspective of how much it costs to actually run a business. With that,
Are there different ways to categorize overhead costs?
Naturally, the cost of doing business can vary month-to-month, week-to-week and day-to-day. Some of your overhead costs may remain the same when payments are due, while others can vary. We like to account for all forms of overhead costs so that you can better understand the whole picture when making business finance decisions. We like to break down overhead into three distinct categories to help with proper bookkeeping: Fixed, Variable and Semi-variable.
Fixed Overhead Costs
The rent you pay for your brick and mortar location is likely the same amount every month. No matter how your business is performing or what is happening in the market, you’re responsible for paying that pre-determined and set amount for rent every single month. Because this amount does not change, it is an example of fixed overhead. Other examples would be the interest on mortgage payments, regular services like the gallons of water you have dropped off for your dispensers or the office cleaning crew that comes every week like clockwork. Hopefully, you are working with a reputable web hosting company that doesn’t nickel and dime you for expected monthly services like ad management and reporting. Additionally, bookkeeping services should be consistent and affordable – though we do agree and even offer a la carte options. This is a great choice when looking to save on as-needed bookkeeping services.
As the name implies, variable overhead costs will vary between payments. They could even be one-time costs to account for. Say a staff event or during a season of hiring staff through a third party. Your location likely doesn’t have the exact same electric bill each month and even vehicle maintenance or repairs will have their own unique costs. These can often fly under the radar as they aren’t the usual withdrawal from an account. Keep variable overhead costs in mind!
As expected, semi-variable overhead covers scenarios where costs fall somewhere between variable and fixed overhead. Let’s say your business phone has a consistent flat rate. Yet, during your travels, you pay a bit more for Wi-Fi on the go or in the air. Consider any costs that are add-ons to a regular payment you already account for. Did you plan to pay staff bonuses that accompany fixed payroll amounts? Or perhaps upped the ante on the marketing campaign during a seasonal event or holiday? These, too, can slip through the cracks and cost you even more when underreported.
How best do I calculate overhead costs?
This may sound biased, but hire us! We have decades of experience and can provide more than just the basics! Two Sense Consulting is in the business of helping you run yours more cost-effectively and efficiently. We do it all and also offer a la carte options that you can use. On a fixed or variable basis – see what we did there? Contact us today and learn how we can help you and your business’ bottom line via our free consultation!