Overhead
Ongoing expenses not directly tied to production.
Overhead encompasses all ongoing business expenses that are not directly attributable to producing a specific product or service. This includes rent, utilities, administrative salaries, office supplies, insurance, and accounting fees. Overhead must be covered by gross profit before the business can achieve net profitability. Controlling overhead is essential for maintaining healthy margins.
Example
A software development agency has $30,000/month in overhead: $8,000 rent, $15,000 administrative salaries, $3,000 in software tools, $2,000 utilities, and $2,000 insurance.
Why It Matters for Your Business
Overhead eats into your gross profit, so keeping it lean—especially during growth phases—directly improves net profitability.
Practical Tips
- •Review overhead expenses quarterly and challenge each cost with "is this still necessary?"
- •Calculate your overhead rate (overhead ÷ revenue) to benchmark against industry standards.
Related Terms
More Business Terms
Accounts Reconciliation
Ensuring account balances match between different records.
Break-Even Point
The sales volume at which revenue equals costs.
Budget
A financial plan estimating income and expenses.
Financial Forecast
A prediction of future financial performance.
Capital Expenditure
Funds used to acquire or upgrade physical assets.
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