Understanding
Overhead
Est. reading time: 6 min
Overhead costs are the expenses that keep your business running, even if you're not producing goods or services. These costs include things like rent, utilities, and salaries for support staff. Below, we’ll explain what overhead is, the different types, and how to calculate it.
What Is Overhead?
Overhead refers to the ongoing costs of operating your business. These are expenses that aren't directly tied to producing a product or delivering a service. Instead, they support your business as a whole.
For example, paying your office rent or covering the cost of insurance are considered overhead expenses. They're essential for keeping your business running smoothly.
Types of Overhead
Overhead costs can be grouped into three main categories:
- Fixed Overhead: These costs stay the same each month. Examples include rent, insurance, and property taxes.
- Variable Overhead: These costs change based on your business activity. Examples include utility bills or office supplies.
- Semi-Variable Overhead: These costs have both fixed and variable components. For example, a base phone bill may stay the same, but additional charges vary with usage.
Why Is Overhead Important?
Understanding overhead helps you manage your business expenses more effectively. Here's why it matters:
- Control Costs: Knowing your overhead lets you find areas to cut unnecessary expenses.
- Set Accurate Prices: You can price your products or services better when you know your overhead.
- Track Profitability: Overhead costs affect your bottom line. Tracking them helps you stay profitable.
How to Calculate Overhead
To calculate your overhead rate, use this formula:
| Overhead Rate = | Total Overhead Costs |
| Total Sales |
Example: If your total overhead costs are $5,000 per month and your sales are $25,000, the overhead rate is:
| Overhead Rate = | $5,000 |
| $25,000 |
Your overhead rate is 20%. This means 20% of your sales revenue goes toward covering overhead costs.
The Docelf Advantage
Managing overhead is easier when your financial records are organized. Docelf helps you stay on top of your invoicing and payments, so you can focus on running your business. With Docelf, you can:
- Track Payments: See which invoices are paid or overdue in one place.
- Simplify Invoicing: Create professional invoices quickly and keep everything organized.
Ready to streamline your financial management? Start your free trial with Docelf today!
