A business’s overhead costs are expenses that are not directly related to its products or services. However, many small businesses find these costs can add up quickly, eating into profits and making it difficult to stay afloat.
Managing overhead costs is essential for any small business owner. Here is a guide to some of the most common overhead costs and how to keep them under control.
Overhead Costs: What Are They?
Overhead costs are expenses incurred in running a business that cannot be directly attributed to any specific product or service. They include rent, utilities, administrative salaries, and other general expenses. As a result, small companies must carefully track and manage their overhead costs to stay afloat and profitable.
The Different Types of Overhead Costs for Small Businesses
There are many overhead costs that small businesses may incur, and these costs can add up quickly. Therefore, it is essential to consider all overhead expenses before starting a business. Below are the most common overhead costs for small businesses.
Rent or Mortgage Payments
For many businesses, the biggest overhead cost is the price of their commercial space. In addition, the average small business owner spends $500 to $5,000 monthly on rent or mortgage payments.
Consider subletting part of your space or moving to a smaller location to reduce this expense.
Insurance is another major, but vital cost for many small businesses. The cost of business insurance for retailers can a vary depending on a few factors. For example, the cost may fluctuate based on the products or services you sell and the type of work your employees doing. Instead of looking into tailored business insurances policies, some small businesses opt for the cheapest options avaialble.
This can be a massive mistake, as anything can happen when running a business. A customer can slip and fall, or a fire can start from nowhere. When this happens, the owner is the one footing the bill to cover an accident’s legal and medical fees if they do not have the proper coverage.
Insurance can cover the costs of these situations and help protect the business owner’s assets. To save on this expense, shop around for the best rates and consider raising your deductible.
Electricity, water, and trash removal are just a few utilities businesses have to pay for. Unfortunately, the costs of these utilities can add up, so it’s essential to budget for them accordingly.
Try energy-saving measures like LED lighting and installing weather stripping to reduce costs.
Wages and Benefits
Employees are often a business’s biggest asset, but they also come with a cost. In addition to regular wages, companies must also factor in the cost of benefits like health insurance and retirement plans. To save on wages and benefits, consider reducing hours or offering employees incentives for completing tasks efficiently.
Businesses have to pay state and federal taxes and property taxes if they own their commercial space. All these taxes can add up, so it’s important to factor them into your overhead costs. In addition, consider taking advantage of tax breaks and deductions to reduce your tax burden.
Advertising and Marketing
Getting the word out about your business can be expensive, but growth is essential. So make sure you allocate a healthy portion of your budget to marketing and advertising.
To save on advertising and marketing costs, consider using free or low-cost methods like social media or word-of-mouth marketing.
Office Supplies and Equipment
From paper and ink to furniture and computers, office supplies and equipment can add up quickly. Be sure to include these costs in your overhead budget so you can properly price your products. You can reduce these costs by buying in bulk or reusing materials.
The Importance of Knowing Your Overhead Costs
Any business’s success depends on making a profit. To make a profit, you need to understand your overhead costs. Overhead is the indirect or variable expenses necessary to keep your business running, such as rent, utilities, insurance, and payroll.
While some overhead costs are fixed (meaning they don’t change from month to month), others are variable (meaning they fluctuate based on production). Understanding the difference between fixed and variable costs is essential for making informed decisions about pricing, production levels, and marketing strategies. Keeping a close eye on your overhead costs can ensure that your business is profitable and sustainable in the long run.
How to Calculate Overhead Costs
As a small business owner, one of your key responsibilities is to ensure that your business is profitable. To calculate your overhead cost, start by creating a list of your ongoing expenses. Then, total the amount you spend on each expense category every month.
For example, if you spend $500 on rent and $200 on utilities, your monthly overhead costs would be $700. Once you have calculated your monthly overhead costs, you can divide this by your total monthly sales to get your overhead percentage. For example, if your monthly sales are $5,000, your overhead percentage would be 14%.
Knowing your overhead percentage can help you price your products and services more effectively and decide where to allocate your resources. In addition, by controlling your overhead costs, you can ensure that your business is as profitable as possible.
Never Cut Corners When It Comes to Business Insurance
The overhead cost guide for small businesses can help you make informed decisions about your expenses. By understanding the different overhead costs and how they impact your bottom line, you can better manage your budget and keep your business running smoothly.
Also, when it comes to insurance, never risk not getting coverage to avoid paying the expense. Instead, shop around to find the insurance coverage you can pay for.