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We work with small business owners and entrepreneurs. Some are seasoned, others are just growing their side hustle. Their skills are varied and they have a wide variety of talents. We often get asked to explain the ins and outs of financial reports and have found that providing our favorite clients with a working knowledge of accounting terms is helpful. With that end in mind, we're sharing that expert knowledge with you. So if you're looking to get a better grasp on your small business books, want to understand your financial reports so you can make better business decisions, or even are just starting out and want to do it right... you can check out our word of the week and start expanding your working financial knowledge.
First things first. If you're wanting to know more about your business expenses we have to start at the beginning. You can read more about Expenses here. An overhead expense is one of two types of business expenses and includes the costs of running your business. These costs could include but aren't limited to rent, utilities, employee wages and more. These type of costs ARE NOT related to the COGS but instead are things that do not generate revenue. Overhead expenses are costs that have to be paid even if business is slow and a smart business owner keeps some cash to fulfill these obligations just in case there's a month or two that go by where profits might not be what they'd like.
Knowing your overhead costs can help you set your prices for the products you sell or the services you render so that you'll end up with profits. Factoring in the overhead will show you just how much money your business needs to bring in so you can stay afloat or even grow. You can also use your overhead expenses to help you figure out your net profit or bottom line. Knowing what you're spending on overhead expenses can be the first step in strategizing a way to bring those costs down. Simply reducing the amount you put towards overhead expenses can increase your net profit.
1: What is an Overhead Expense?
Overhead expenses are the ongoing costs of operating your business, such as rent, utilities, and employee wages. These expenses are not directly tied to generating revenue (unlike the cost of goods sold or COGS) and must be paid even when business is slow.
2: How Can Understanding Overhead Expenses Benefit My Business?
Understanding your overhead expenses helps you set appropriate prices for your products or services, ensuring you cover costs and make a profit. It also allows you to better calculate your net profit and strategize ways to reduce expenses, ultimately boosting your bottom line.
3: Why Should I Track Overhead Expenses Regularly?
Tracking overhead expenses regularly gives you a clearer picture of your financial obligations, helping you manage cash flow more effectively. It also helps you plan for periods of lower profits, ensuring you have enough cash on hand to cover these essential business costs.
">We work with small business owners and entrepreneurs. Some are seasoned, others are just growing their side hustle. Their skills are varied and they have a wide variety of talents. We often get asked to explain the ins and outs of financial reports and have found that providing our favorite clients with a working knowledge of accounting terms is helpful. With that end in mind, we're sharing that expert knowledge with you. So if you're looking to get a better grasp on your small business books, want to understand your financial reports so you can make better business decisions, or even are just starting out and want to do it right... you can check out our word of the week and start expanding your working financial knowledge.
When it comes to your business, assets can come in a few different forms. So let's break it down. Assets, are either tangible (physical) or intangible (valuable, but cannot be touched) items that are considered property of a business or individual, have value, and are available to meet commitments and debts of said business or individual.
Our short list of business assets and what category they fall in (tangible vs. intangible) is as follows:
Additionally, you can categorize assets as either current or long-term. Current assets or short-term assets included items that could be converted in to cash easily within a 12-month period. Your accounts receivable or the balances of your current business checking or savings accounts are a good example.
Long-term assets are items that aren't intended to be turned into cash within that short 12-month period. Goodwill with your customers and vendors along with things like buildings, your machinery, and long term investments (more than 12 months to maturity) are things are considered long-term assets.
Once you have them categorized, assets have to be valued - and the value of an asset isn't always what you paid for it. When putting a current value to your assets, you or your accountant will need to consider the following:
You may be thinking this is all fine and good, but what does knowing all about your business assets really do for you? Well, that's a good question that definitely deserves an answer.
Knowing your business assets can help you run your business in a variety of ways. Often you'll hear those finance guys talking about working capital, which is just a fancy term for the money you need to cover your day-to-day business operations. Knowing what it costs to run your business means you're armed with the info to make sound business decisions - and your short-term assets and current liabilities is what you use to compute that working capital number.
As a business owner, you'll want to grow your business and might need to take out a loan to do so. The bank or investor might ask you to put up collateral - your tangible and intangible assets can be used for that collateral and help you secure the loan.
And finally, when you're putting your heart and soul into something you want to make sure that you're mitigating risk. One way to do that is to have insurance. You're sinking your hard earned cash into equipment, an office space or building and so on. Having a list of both tangible and intangible assets and their current value can help you determine what to insure, and that you've insured it with the right amount of coverage.
">Supporting small businesses is what we do. Let's chat about your tax strategy so we can help you keep more of your hard-earned money.
