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.
What Is An Overhead Expense?
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.
How Does Knowing Your Overhead Expenses Help?
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.
Frequently Asked Questions
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.
