Overhead
Overhead is integral to a company, business, or facility's operating expenses (OPEX), including all the expenses a business or facility incurs to stay operational, irrespective of its production volume. These overhead costs, like rent and salaries, can be fixed or variable, such as utility bills, which fluctuate with facility usage.
Some overhead examples are:
- Workspace costs. Rent or mortgage, utility bills, mandatory insurance
- Labor costs. Salaries for permanent staff
- Technology costs. Yearly software licenses and managed services
Despite maintenance often being labeled as a fixed cost, many overhead maintenance and operating costs are variable, based on business activity or season.
Overhead vs. capital expenses
While overheads recur regularly to the company pay for operations, capital expenses (CapEx) are significant, as well as one-time purchases or investments, like new equipment or development of assets, expected to benefit the company and business over time.
Importance of managing overheads
Efficient overhead management is crucial for enhancing profitability. For example, modern general cost-down strategies include leveraging technology to pay for automation and considering remote work to reduce office space expenses. However, indiscriminate general cost-cutting can sometimes limit growth and overall value.
FAQ on overhead costs
What is considered overhead?
Overhead refers to the routine expenses necessary for operating a company, facility, or business, such as office supplies, marketing, rent, utilities, insurance, and employee salaries, that are not directly linked to producing a product or service.
What is an example of an overhead cost?
A typical example of business expenses is utility expenses paid for electricity and water. These utilities are essential for maintaining a functional production workspace but do not directly account for manufacturing goods or service delivery.
What is the difference between overhead and fixed cost?
"Overhead" pertains to operational and maintenance business expenses not directly tied to production. At the same time, "cost" encompasses all other business expenses and expenditures, including direct production costs, such as materials and labor paid for manufacturing production.
What is actual overhead cost?
This term describes data on a company's total overhead operating expenses over a specific period. It is essential data a company has for budgeting and financial planning to ensure competitive pricing and profitability.
What percentage of income should be overhead?
Generally, it's best to ensure that your business' expenses are at most a 35% overhead rate, but there's no hard and fast rule. It depends on your business model. Remember that overhead includes all costs except direct labor, materials, and expenses on your income statement. Overhead includes rent, accounting fees, advertising, insurance, interest expense, legal fees, labor burden, repairs, supplies, income taxes, telephone bills, travel expenditures, utilities, etc.
How LegalZoom can assist
LegalZoom supports businesses in effectively managing overhead expenses and business operating costs through:
- Legal compliance guidance. Navigating the legal aspects of running a business
- Financial planning support. Helping budget for overhead, including labor and technology expenses
- Contract management resources. Offering clear contract templates for employee and vendor agreements to minimize misunderstandings
Understanding and strategically managing overhead expenses is critical for businesses' financial health and growth. LegalZoom provides the expertise and resources needed for small business owners to navigate overhead costs efficiently, ensuring compliance, effective overhead expense budgeting, and streamlined overhead operations for sustainable success.