Every business owner should have a thorough familiarity with the realm of overhead costs. If you’re not so sure you understand the concept clearly, it’s time to clear the fog.
Overhead costs include expenses (fixed or variable) which don’t have anything to do with the manufacture or delivery of a product/service. If you’re not properly accounting for the full breadth of overhead for your business, you could run into some serious financial issues.
Save yourself the strife of financial trouble, and educate your mind to the various ways in which you can create a clear picture of your business finances. Check out a quick overview of some helpful tips for calculating your business overhead costs, and remove the mystery from the situation.
Account for fixed and variable costs
There are different kinds of expenses related to running your business. Some expenses are the same every payment cycle, and those are referred to as “fixed” costs. Some expenses are shift and skip payment cycles, and those are referred to as “variable” costs.
“Semi-variable” costs are bills and other things that may cost more or less each payment cycle. The cost of a sudden leaky roof is a prime example of a “semi-variable” expense. Often, entrepreneurs lump their “semi-variable” costs in with the “variable” expenses to simplify the financial outlook.
Here are a few examples of each type of cost.
- Common fixed – rent, mortgage, depreciation on assets, payroll costs, utilities, and liability insurance costs
- Common variable – phone services, office supplies, printing, packaging, mailing
- Semi-variable costs – vehicle usage, overtime payments, sales commission payments
How to calculate your overhead
Calculating your overhead costs is the first step to getting a firm grasp on your overhead rates. An overhead rate will grant you an accurate picture of just how much of your profits are being spent on just existing.
Once you have recorded all of your various overhead expenses, add them all together. Your total is your overhead calculation, but you can go a step further. Calculate your overhead rate by taking your total overhead costs and dividing it by your total sales for the month, and the figure you end up with is your overhead rate.
Why overhead calculations are important
Having an accurate outlook on your overhead costs will place you in a more capable position to succeed. You’ll be able to calculate what may be helping/hurting your overall profit by pinpointing the various elements of what makes up your total overhead expenses each month.
Use the information you collect to build a more effective way of managing your operations. Maintain a regular eye on your overhead costs, and make sure they don’t fluctuate too much.