Being a business owner involves several moving pieces that can be hard to keep track of. And as a small business owner, you may have difficulty running your business and continuing bookkeeping services. And knowing your overhead costs is a part of running your business in a way that helps your profitability margins.
Overhead costs are the expenses that come with running your business but aren’t used toward creating your product or service. These costs will vary depending on the industry and what your business does. Here’s a guide on how to determine these costs and examples of what to include.
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What Are Overhead Costs?
Overhead costs are typically referred to as operating expenses. These expenses are associated with running a business that can’t be linked to creating or producing your product or service. These are the costs that incur to stay in business, regardless of success level.
There are some overhead costs that typically every business has to deal with, including:
- Administrative costs
- Sales and marketing
- Repair and maintenance of technology
These costs typically can’t be avoided as they are needed to run the business, regardless of industry type. It may be difficult to reduce these overhead costs as you will have constant operating costs no matter the size of your business, but they will increase as your business grows.
There are three main types of overhead costs that a business can incur. They will vary depending on the nature of your business and industry. The following are the categories of overhead costs that you’ll run into.
1. Fixed Overheads
Fixed overheads are costs that remain constant every month and do not change based on the activity of your business. This typically includes salaries, rent, property tax, depreciation of assets, and government licenses.
2. Variable Overheads
Variable overheads include expenses that will vary based on your activity levels. They will increase or decrease depending on what your company is doing. During high levels of activity, your expenses will increase but will reduce substantially in low seasons. This can typically include shipping costs, office supplies, advertising and marketing costs, consultancy service charges, legal expenses, or equipment maintenance.
3. Semi-Variable Overheads
Semi-variable overheads are expenses that share characteristics of fixed and variable costs. This can occur at any time, even though the price will fluctuate based on business activity level. This typically includes a base rate cost but will have additional costs depending on the usage level, such as sales commissions, vehicle usage, and some utilities such as power or water usage.
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How to Calculate Overhead Costs
You’re probably keeping a close eye on all expenses with a small business. You may want to keep these costs as low as possible to ensure a positive profitability margin. To do that, you need to understand how to calculate your overhead costs.
When calculating this, you should avoid including direct production expenses, such as products or materials purchased for resale or direct labor. Your direct expenses should always be calculated in your cost of goods sold, as including them in your overhead costs would increase your expenses.
The easiest way to calculate overhead costs is to add your expenses for a specific period. Many businesses will do this monthly to help them better understand how their business performs monthly.
When calculating your overhead costs, you should include:
- Property Taxes
- Office Supplies
These factors will allow you to see how much your overhead costs are per month. This will help you properly allocate that amount of money regularly. If you know your fixed overhead costs, you can set that much money aside to ensure it’s paid.
If you have variable overhead costs, you can estimate how much it will be monthly. It may be difficult to know how much money per month it will cost first, but calculating your overhead costs regularly can help you predict these costs for the future.
Why Is Knowing Your Overhead Costs Important?
Overhead costs directly affect the financial success of your company. Your balance sheet and income statements will be impacted if the overhead costs are not known or incorrectly calculated for overhead costs that can decrease your profits from inaccurate product pricing.
Not including your overhead costs when pricing a product or service can result in a significant loss of profit if the product is priced too low. But if your overhead costs are estimated too high, that could cause you to overprice your products resulting in slow inventory movement.
Knowing your business’s overhead expenses can help you be more proactive in your business management. You’ll have a deeper understanding of your company’s financial statements and how that impacts your business. You may even use this information to learn how to reduce your overhead costs.
There are a few things that you can do to reduce your overhead costs and help with your profit margins, including:
- Invest in an accountant to help evaluate financial statements and provide advice
- Find a more cost-effective office space that still allows you to produce your service or product
- Rent instead of buy equipment that won’t be used regularly within your company
- Reduce your team to people that ensure everything gets done but don’t require excessive amounts of people
- Outsourcing tasks or responsibilities can reduce paying wages and spare you time to focus on other aspects of your business
- Review your contracts to evaluate their value and renegotiate if necessary
These small changes to how your business operates can significantly affect how much money you save and put towards other things. Understanding your business details will ensure that you’re making informed decisions about where to take your business and how to continue improving your products or services.
How Can Financial Optics Help Your Small Business?
Financial Optics is the right choice for your small business because we care about sustainably growing your business and have the expertise to help it thrive. With over 30 years of experience, we understand that running your business can sometimes be taxing and difficult. But with the right help, you can gain support in your small business journey.
Our accounting services are top-notch, and we work on your accounts daily to ensure everything is done correctly. We work with you so you can see your financial statements and make business decisions that can help you thrive. If you’re interested in learning more about how your overhead costs affect your business, you can talk with our team to see how change can positively impact you.
You can also utilize our CFO services to gain further insight into your business and know what investments you should venture into. At Financial Optics, we care about your small business and what we can do to help you focus on the growth of your business. If you’re ready to see what changes can be made to your business to take it to the next level, don’t hesitate to call.
Are you ready to see your business thrive? Schedule a free consultation with Financial Optics today to learn more!