As you operate your business, you will need to budget for different costs. Understanding these various expenses can help you avoid overspending and maximize earnings within your business.
One of the most costly expenses in your business is overhead. This guide will walk you through overhead and answer some of the common questions associated with this business expense.
What Are Overhead Costs?
Overhead costs are also known as indirect expenses. These are costs not directly associated with creating a product or offering a service.
What Are Some Examples of Overhead Costs?
Every business will have unique overhead costs. However, a few common examples include:
- Office supplies
- Advertising costs
- Legal expenses
For example, a coffee shop would have direct costs like beans, milk, and equipment to make the products. The cash register used to ring up the cup of coffee would be considered overhead because it is not essential to the product but still needed to run a business.
Why Should You Track Overhead Costs?
Understanding your overhead costs can give you more granular insight into the profitability of your business.
For example, if you make $200,000 in sales and it costs $20,000 to make the products, you might think your profit is $180,000. However, your actual profit would be $130,000 if your overhead costs are $50,000.
Understanding your overhead costs can help you determine what you save or spend money on, ensuring your business is actually profitable.
How Do You Budget for Overhead Costs?
One way to budget for overhead costs is to have an organized expense sheet. You can create an overhead section that accounts for expenses not directly related to creating your products or services.
Overhead costs can be static or dynamic. You may pay a flat amount in rent each month but have variable overhead costs for your marketing needs or operational fees.
By tracking your overhead costs, you can understand if your business is profitable and make adjustments to increase your gross margin. As your business grows, use a tool like Sunrise to track your expenses and manage your overhead. Try this free app today and learn how it can help you.