Overhead is the cost of running your business. Understanding what your business overhead is is important to make sure you don’t lose money on your hourly rate or profit margin. This guide will walk you through what overhead is, why it’s important and how to calculate it.

What is overhead?

Overhead is costs associated with running your business that is not directly related to the work you do for a customer.

Examples of overhead:

• Rent
• Electricity
• Wages (if you employ people or outsource staff)
• Access fees (equipment rental/subscriptions)

Overhead means different things to different businesses. It’s not necessarily a bad thing if your overhead makes up 90% of your income, but you need to be aware of this before you can do anything about it.

Set a profit percentage

Knowing how much to make as profit (and therefore how much to charge for an hour of your time) is largely driven by the type of overhead you have. If all of your income goes towards covering costs, then you can’t afford to work less or do anything else with that money.

This means your profit margin should be larger than the industry average. If it isn’t, you need to either gain more clients or cut costs.

Make a list of all of the types of overhead you have. This can be done in a basic Excel sheet with columns for each month and rows for each different expense in your business. Add every expense you pay from your business account when you’re not working on client work such as rent, electricity, wages, and access fees. If you pay a lump sum for something over a number of months such as an annual subscription, then divide the amount by the number of months you have to pay it off.

Include your salary as an expense. You can either treat this as personal or business spending, depending on how much relevant work you do for your business.

Administrative overhead

Administrative overhead like an internet package, accounting/bookkeeping, and legal and audit fees are also essential.

There are also things like software and office technology that you may need to consider. One pertinent example is digital signature collection software. Companies like DocuSign are okay, but really you want to be looking for Docusign alternatives that have more transparent pricing and are more reliable.

Another example is communication software and workplace interfaces. Do your research for each of these and find what works best for you and your business in order to keep overheads to a minimum.

Travel overhead

Travel overhead is self-explanatory. It’s the cost of traveling in your car, on public transportation, or via flights/trains to go places related to business. If you travel regularly for work, include the additional costs here.

Spending time away from your business to work on client projects or marketing is essential but easily forgotten in the overhead equation.

Manufacturing overhead

Manufacturing overhead is costs like the machines you use to make products. This excludes workstations, such as those used for graphic design. A lot of manufacturing overhead is one-off costs, but some are ongoing. Make sure to include any relevant expenses in your list along with the frequency of purchases.

Office overhead 

Office overhead includes stationery, furniture, and general upkeep of your office space. This doesn’t include home office equipment. Include any unexpected or one-off office expenses in this section too.