How to Calculate Overhead

Overhead is important to any business owner. It is the collection of business expenses that you pay each month, quarter, or year. It does not include labor costs, costs of materials used to make products, or expenses bills out to customers directly. Knowing your overhead costs are important because you need to consider them when pricing your products in order to continue turning a profit in your business. Do you know how to calculate overhead? Let’s find out.

What Overhead Costs Apply to You

Overhead costs include rent and utilities, which most business owners pay, repairs to the building you maintain which you may or may not pay depending on whether you have a landlord that pays for them or you pay for them out of pocket, office supplies, paying your accountant, and other expenses.

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Tracking Your Overhead Costs

Overhead costs should always be a fixed amount. For example, your rent should never go up or down. At the end of your lease, it may go up, but then it will be a fixed amount again. Utilities sometimes fluctuate depending on the season but you can usually always guesstimate what they will be depending on what time of year it is and set that amount aside for it.

If you set the same amount of money aside each month for repairs or building maintenance you don’t have to worry about those expenses popping up on you. You should always know what your accountant’s bill is each month and you should expect to pay extra around tax season.

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Calculating Overhead Costs

You need to figure out the ratio of overhead costs compared to the total amount of sales revenue. The lower the percentage figure, the more efficient your business is running. It may also be helpful to figure out the ratio of overhead costs to labor costs. Again, the lower this percentage the better. You don’t want overhead costs to overrun your business.

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Lowering Overhead Costs

There are some overhead costs you can’t do anything about, such as rent or utilities. You can, however, try to bring some things in-house, like accounting, instead of contracting it out. Doing this can save some money if you plan on saving some money on overhead.

Hiring a part-time accounting, or even a freelance independent contractor instead of hiring a company to handle your bookkeeping can save money in the long run. Lowering overhead expenses can help your business run more smoothly.

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Between making sure your revenues cover all overhead and lowering overhead expenses, you can make sure your businesses is as profitable as it can be and runs smooth.

However, you have to know how to calculate your business’ overhead expenses properly before you can do that. You must also calculate overhead expenses every so often to make sure that you don’t need to adjust things to keep your business in the black.

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