One of the most common reasons that companies end up going out of business is due to a poorly-developed internal system of operations. More specifically, poor financial management often leads to the downfall of many small companies within only a few years after they’re founded.
Overhead cost, in particular, is something that many entrepreneurs fail to optimize, and it’s easy to run into financial issues through long-term overspending.
But what is overhead cost exactly? Not everyone is sure of the answer.
Not sure where to start? Don’t worry. We’ve got you covered. Let’s take a look at everything you need to know.
So… What Is Overhead Cost?
The term ‘overhead’ in a business context is an ongoing cost not associated with manufacturing or providing a product or service. For example, a clothing company buying blank T-shirts would consider this production cost.
Overhead is an important figure to consider since it will directly influence your pricing when it comes to your company’s goods and services. A significantly high overhead cost will result in you charging your customers more so that you can profit.
To help clarify, overhead could be thought of as a sort of ‘operational cost’ in the fact that this expense is required to run your business.
What Are Common Types of Overhead Costs?
There’s a large handful of different overhead costs you may encounter, varying from industry to industry. But, a few are relatively consistent among different types of businesses.
Let’s explore a few of the most noteworthy.
Rent
This is likely one of the most significant overhead costs that you’ll encounter. Depending on the size and location of your office space, you may even spend thousands per month just to have a location for your business to operate out of.
Some facilities also charge other fees in addition to rent, such as for security cards, access to the building after business hours, monthly janitorial services, etc. If these expenses aren’t explicitly listed as separate costs by your landlord, they’re likely included in your rent and could be a contributing factor behind a rent payment that’s exceptionally high.
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Business Insurance
In order to protect yourself from lawsuits, you’ll need to purchase business insurance. Since this cost is required in order for your company to operate safely and efficiently, it can be considered overhead.
Depending on what industry you’re in, you may need to purchase a different type of insurance than someone you know who operates in a different field. For example, someone who works in event entertainment will have different obligations than a person who runs an athletic apparel company.
Property Tax
Yet another unavoidable cost for many people, property taxes are a form of overhead that anyone who owns a house, building, etc. has to pay. But, these taxes never change (without government intervention) depending on the level of production the business exhibits, making them completely fixed from payment to payment.
It should be noted, though, that owning an overly large office building or production facility will result in you paying more in taxes than you need to.
Office Equipment
Computers and other various office supplies, although material objects with plenty of other utility, are required in order to run a standard business. So, they can be considered overhead costs.
Other office overhead can include refrigerators, printers, and fax machines. Software is also a form of office overhead, and billing software is one of the most common types.
Utilities
Electric and water bills are overhead costs that every business incurs. Gas also falls into this category when it becomes a necessary utility.
In general, factories and large production facilities will often have a high utility cost. This is especially true if the bill is standardized, which is priced higher to account for the potential waste of resources.
How Can I Reduce My Overhead Costs?
Downsizing your current office space is one of the most efficient ways you can reduce your overhead. Oftentimes, new business owners splurge on overly large office complete with amenities, superfluous decoration, etc.
While these are great assets to have once your company is well established and successful, they’re often unnecessary and impractical for smaller companies. So, consider your rent payment and how much of your current space you’re actually using for business purposes— you may find it logical to downsize.
Avoiding unnecessary purchases is also a great way to reduce your business’s overhead. Expensive computers, office furniture, and brand-new company cars will only serve to further burn a hole in your company bank account.
Additionally, having your company go paperless is a great way to avoid unnecessary spending on printer ink (and of course paper) while also increasing productivity by eliminating the need to wait for documents to print or copy.
Instead, you can take advantage of cloud storage to archive your company’s sensitive data and have a centralized location for employees to access anything relevant to their role that they need to. It also has the added benefit of positively impacting the environment.
Related:
Reducing Overhead Cost Can Seem Difficult
But it doesn’t have to be.
With the above information about ‘what is overhead cost’ in mind, you’ll be well on your way to ensuring that you never spend a dollar more than you need to when it comes to ongoing expenses.
Want to learn more entrepreneurship tips that can help you out in the future? Be sure to check out the rest of our blog.
