Whether you are in high demand or barely producing a product, overhead costs are the expenses paid to keep your business running.Having a good record of overhead costs will help you set a better price for your product or service, show where you can save money, and illuminate ways to streamline your business model.The best way to calculate your business's overhead costs comes from careful bookkeepers, so read on to figure that out.
Step 1: Overhead costs are expenses that are unrelated to your product.
They are referred to as indirect costs.Rent, administrative staff, repairs, machinery, and marketing costs are some of the indirect costs that must be paid regularly.In our example, postal rates and insurance are necessary to run a business, but not make a product.If you're calculating your overhead, make sure to consider whether it's a fixed cost or a variable cost.Variable costs are those that change according to your business's activity and level of production.
Step 2: Direct cost is the cost of creating a good or service.
Demand for your product and the market price of materials will affect these costs.Direct costs for a bakery are labor wages and ingredients.Doctors' salaries, stethoscopes, etc., would be the things that a health clinic would include.Wages and materials are the most frequent direct costs.Direct and indirect costs pay for the things on the assembly line.
Step 3: For a month, quarter, or year, make a list of every expense.
Most businesses break their expense reports down by month.If you calculate indirect costs monthly, you must calculate direct costs as well.You can use computer programs to keep your list organized.Don't worry about the expense going where.Before calculating overhead, you need the full picture of your expenses.
Step 4: Common overhead costs should be accounted for.
Taxes, rent, insurance, licensing fees, utilities, accounting and legal teams, administrative staff, facility upkeep, etc. are inevitable expenses for all companies.Leave nothing to chance!To make sure you don't miss anything, look over expense reports and receipts from the past.Don't forget about recurring expenses such as renewing a license or filing permits.They still count as overhead.
Step 5: If you don't know your expenses yet, use old costs or estimates.
If you want to start a business, you need to research the costs of supplies, labor and overhead.You can use old accounting books to plan for next year's costs.Unless you are making large changes to your business plan, they are the same numbers.To adjust for statistical anomalies, average your old costs over 3-4 months.
Step 6: Depending on your business model, divide your list into direct and indirect costs.
It is possible to make a judgement on certain expenses.Legal expenses directly contribute to production if you run a law firm.Overhead costs are what you would pay if you stopped producing.What keeps your business going?This list should be updated every time you incur a new expense.
Step 7: To get your overhead costs, add all of the indirect costs together.
This is the amount of money you need to survive.Our yearly overhead is $16,800.It's important to know this number when creating a business plan.
Step 8: You can find your overhead percentage.
An overhead percentage is the amount of money spent on overhead and on making a product.To find out your overhead percentage, divide indirect costs by direct costs.In the example above, our overhead rating is.35 (16,800 / 48,000) Multiply this number by 100 to get your overhead percentageYour business spends a third of its money on legal fees, administrative staff, rent, and other things.Every product it produces.The larger your profit, the lower your overhead rating is.It's good to have a low overhead rating.
Step 9: Compare yourself to similar businesses with your overhead rating.
Companies with a lower overhead rating make more money when they sell their product.You can sell your product at a more competitive price if you lower your overhead rating.
Step 10: To see how efficient you are with your resources, divide your overhead costs by your labor costs.
To get the percentage of overhead used by each worker, multiply this by 100.Your business spends its overhead costs more efficiently when this number is low.If it's too high, you might have to hire a lot of people.
Step 11: How much of your revenue pays for overhead?
Divide your overhead costs by the amount of sales you make to get a percentage.Ex.If my business sells $100,000 worth of soap a month and it costs me $10,000 to keep my office running, I spend 10% of my revenue on overhead.The higher the percentage, the lower the profit margin.
Step 12: If these numbers are too high, you should trim or manage your overhead costs.
Wondering why you aren't making a lot of money?You may need to sell more products to cover overhead costs.Maybe you have too many workers and aren't spending enough money to keep them employed.You can use these percentages to make changes to your business model.Businesses pay overhead, but those that manage it turn a higher profit.Having low overhead isn't everything.It is possible to have higher productivity and higher profits if you spend money on good equipment.