As a small business owner, overhead costs are unavoidable, unfortunately. They are a part of every business, whether big or small. But what are overhead costs exactly? Below, we’ll outline what overhead costs are, common overhead costs for small businesses, how to calculate overhead, and how to reduce these expenses.
What Are Overhead Costs?
What is classified as an overhead cost? Overhead costs are the indirect costs of your business that aren’t associated with making a product or service. These costs are things such as administrative salaries, licenses and permits, property taxes, etc. They can easily add up and become overwhelming if not closely monitored. It is important to spend time calculating your small business overhead costs to avoid them getting out of control.
What are examples of overhead costs? Some common costs for small businesses include:
- Rent or mortgage payments
- Business insurance
- Payroll and employee benefits
- Professional fees (accounting, legal, etc.)
- Website and internet service
- Telephone service
- Shipping and handling
These are just some examples. Overhead costs will vary from business to business.
Overhead Costs for Small Businesses
Here are some of the most common overhead costs for small businesses. This list should help give you an idea of what to look for when calculating the total costs. We’ve split them into three categories: fixed costs, variable costs, and semi-variable costs.
1. Fixed Costs
- Mortgage Payments. Mortgage payments are a fixed overhead cost that you may have as a monthly payment.
- Insurance. Business insurance is another fixed overhead cost that small businesses will have to protect their business.
- Property Taxes. Property taxes will depend on the area you’re located in, but these do not typically change.
- Rent. Monthly rent payments are considered fixed overhead costs because they do not change and are not related to the products or services of your business.
- Administrative Salaries. Salaries of administrative employees can be considered overhead costs because these employees are not directly involved in the products or services provided by your business.
2. Variable Costs
- Office Supplies. Office supplies for administrative roles vary depending on the month and what needs to be replaced.
- Maintenance Costs. Maintenance costs such as janitorial services are overhead costs because they are indirect costs that do not generate profit.
3. Semi-Variable Costs
- Utilities. The cost of utilities may change month-to-month depending on usage.
- Hourly Overtime. Hourly overtime is a semi-variable cost because overtime may not always be available to employees.
- Professional fees. Professional fees such as accounting or legal services may be overhead costs because they do not generate revenue.
Now that you know some of the common costs considered as overhead, we will move onto how to calculate overhead costs for small businesses.
What Is a Good Percentage for Overhead Costs?
A good overhead percentage for small businesses is typically between 10-30%. This will depend on the industry and type of business. For example, a service-based business will have a lower overhead percentage than a manufacturing company. Lower overhead costs mean that there is more profit for the business.
What Is Too Much Overhead?
If overhead costs are too high, they can eat into profits and make it difficult to sustain the business. A general rule of thumb is that overhead should not exceed 35% of gross revenues. This number will vary depending on the industry and type of business.
How To Calculate Overhead Costs & Rate
When calculating overhead costs, it’s vital to understand the difference between a direct cost and an indirect cost. You’ll need to know how to calculate these costs as a business owner to keep your finances in check. The goal is to keep your overhead costs as low as possible and profits as high as possible. To avoid unnecessary spending, calculate overhead costs every month.
Remember that you are only calculating indirect costs that don’t include direct labor or products and materials purchased for your good or service. Once you’ve added all your costs together and have your monthly total, you can calculate the rate of the overhead costs. To calculate the overhead rate for your small business, use this ratio:
(Monthly Overhead ÷ Monthly Sales) x 100 = Percentage of Overhead Costs to Sales
Typical overhead rates for small businesses fall in the 36.31% to 72.97% range, according to The Washington Post.
After you’ve calculated your overhead costs, you can see where reductions can be made to save money. Read on to learn more about how to reduce overhead costs for small businesses.
How To Reduce Overhead Costs
Here are some simple steps you can take to reduce overhead costs.
- Review monthly overhead costs. Use the steps above to calculate overhead costs each month and review them to see if there are changes you can make.
- Brainstorm with employees. Have a conversation with your employees about ideas to cut overhead costs that you may not have thought about.
- Evaluate your staff. Do you need every member of your staff to function? If there are excess positions, you can consider cutting your staff down to only the necessities.
- Go paperless. If you are spending a lot on office supplies, try going paperless to save on the costs of paper, ink, staples, tape, etc.
- Re-evaluate your office space. Is your office too big for the number of employees you have? If you’re paying for unused space, consider downsizing to save on overhead costs.
- Shop around for insurance. You may be able to get a better deal on your business insurance by shopping around and comparing rates.
- Reduce energy consumption. Save on overhead costs by reducing your energy consumption. This can be done by turning off lights and electronics when they’re not in use, using energy-efficient light bulbs, and more.
These are just a few techniques to lower overhead costs. Take a look at how your business functions and see if there are places where you can cut costs.
Cover Overhead Costs With LendThrive
If your overhead expenses are still higher than you can manage after taking steps to reduce them, let LendThrive help! LendThrive, part of AVANA’s Family of Companies, offers small businesses fixed rate business loans. With a fixed rate business loan, you won’t have to worry about covering overhead expenses.
You could qualify for up to $150,000 and be approved in as little as 24 hours. Pay for your overhead costs with a loan from LendThrive and stress no more.