There are a lot of different
business costs to keep up with.
Fixed, variable, operating, product,
period, sunk, out-of-pocket,
indirect— thankfully you're a smart
willful small business owner
so no cost goes over your head.
Well, except for one.
That's right, today we're talking about
overhead costs.
If you want the full lowdown on overhead
costs, check out the article below and
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"Ready, Set, Goals."
Before we calculate your overhead costs,
we have to figure out what they are.
There are two factors that can help us
determine if a cost falls in the
overhead category.
One, it's a fixed cost.
And two, it doesn't directly
result in sales.
Overhead costs are the constant expenses
that always have to get paid regardless
of how much revenue you're pulling in.
It's those costs that just come with
running a business.
So let's play a game called, "Is
That Overhead?"
You'll see some common expenses
show up on the screen and we'll
decide if they're overhead or not.
Rent and utilities: If your business has
an office space, you have to pay the rent
and utilities that come along with it.
This is a constant cost that you know
will pop up every month and that
makes it overhead.
How about insurance?
You know you'll be paying it.
It protects your business from
different risks like natural disasters,
theft, and damage.
Definitely an overhead cost.
Repairs and maintenance,
overhead cost.
If your business uses a lot of
machinery, you'll need to factor in the
maintenance costs.
Most machines need a checkup once a month
to make sure they're running smoothly.
Is your machine running?
Well, you better go catch— nevermind.
Did someone say office supplies?
Your printer, computers,
refrigerators.
Okay, these aren't exactly recurring
fixed costs, but they don't
result in sales.
That's an overhead cost!
Accounting.
Whether it's an accountant or
accounting software, fixed accounting
costs don't directly result in sales.
So, overhead.
Taxes: most common property taxes
are fixed costs.
They don't change and don't result
in sales, overhead.
Spoiler alert!
This next one is not an overhead cost.
Whether you have one employee, ten
employees, or it's literally just
you, direct labor is not considered
an overhead cost.
Why?
Because your employees help in
the production of goods or services.
The same goes for outsourced work
directly related to producing the
goods so they're operating expenses.
Now that we're familiar with some
common overhead costs, let's
do some math.
You'll want to figure out your
business's overhead percentage as a
percentage of sales.
To do that, use this formula.
Take your monthly overhead costs,
divide by monthly sales, and multiply
by a hundred.
That will give you your overhead costs
as a percentage of sales for each month.
Now, if you're in over your head in
overhead costs, here are some ways
to reduce them.
Cut unnecessary expenses.
Maybe you're spending too much
on office supplies.
Consider buying in bulk or switching
up to a less expensive ink.
Trust me, it adds up.
Office space.
If your rent is eating at your
profits, consider looking for a
less expensive place or consider
going remote.
No office space, no rent.
Review and negotiate contracts
with suppliers.
Think of this as a cleanse for your
company; go through all of your contracts
and pricing.
Cancel the contracts you don't need
and negotiate outdated ones.
This is a big way to reduce
overhead costs.
That about does it.
You can now identify, calculate,
and cut overhead costs to keep your
business running.
So, you better go catch it.