What are overhead costs, and how do you track them?

Want to take better care of your business’ finances? Learn what overhead costs are and how to manage them in this article.

Discover the essential accounting information about your business’ overheads, including:

• What is an overhead cost?
• How are overhead costs different from ‘cost of goods sold’?
• Why it’s important to track your overheads
• How to track and manage overhead costs
• How to better understand your overhead costs with Countingup

Whether you’re starting a new business as a sole trader or limited company director, you’ll need to learn more about basic business finances and how to manage them. Read on to find out more about typical overhead costs your business might face, why their management is essential for business success,  and how Countingup can help build your business faster.

A business ‘overhead’ is a category of business expense that is used to separate certain costs from others and are also known as ‘operating expenses’. Specifically, overhead costs are areas you spend money on to run your business but aren’t directly related to your product or service. 

Overhead costs typically refer to the following:

• Rent and utilities (like gas, electricity, etc.)
• Insurance (public liability or business car insurance)
• Council permits or licenses for your premises
• Travel (car loans, fuel, road tax, etc.)
• Office supplies and stationery
• Marketing and advertising (including website hosting and any social media adverts)
• Accounting and legal expenses
• Wages for any staff 

Together, these sources of expenditure help your business in different ways, even if they cost you money. For example, paying for rent and utility overheads means you can have warm and well-lit dedicated business premises for customers to visit. Meanwhile, paying for public liability insurance means everyone is protected if something bad happens in your shop. 

Separating expenses into ‘overheads’ versus ‘cost of goods sold’ (or COGS) can be slightly tricky and will depend on your own business. 

One way to decide whether a certain expense to your business is an overhead or not is if it can be shared with a different business. Use the following prompt as a question to answer: “Is this an expense for my business or any business?”

For example, two shops side by side can each have shared overhead costs, such as electricity and gas, insurance and rent. However, because one retails imported products and the other is a women’s salon, their other costs of goods sold differ. 

One business might pay for staff and hair dyes in this example, while the other has to pay international delivery and customs fees. Therefore, the latter examples (hair dye and customs fees) refer to the specific cost of goods sold for their businesses, while the former examples (gas and electricity) refer to overhead costs that are typical for any other business.

For this reason, many overhead expenses for businesses are common and there can be lots of ways to reduce how much they cost. Find out more in the next section.

It’s important to manage your business’ overhead costs because they can reveal a lot about your business’ health. Similarly, they need managing because they’re not always proportional to your income or trading volume. Therefore, you could find yourself losing money because your sales aren’t enough to cover your business’ other overhead costs.

For example, you can spend money on advertising your business to generate lots of sales. However, your website, rent and electricity costs will stay roughly the same whether you see one customer in a day or 100. Therefore, learning how to track and manage your overhead costs is vital if you’re to maximise your profits.

Finding the right balance between cutting costs and investing in your business is difficult, however. Use the steps below to find out how you can track and manage your overhead costs and see whether you can save money while trading.

Using the examples and question prompt from the first section, make a list of how much your business spends on overhead expenses using a weekly or monthly period as a reference point. 

This will allow you to focus specifically on costs to your business that aren’t related to your cost of goods sold and show you where you’re losing money.

From the list of overhead costs you’ve just made, separate your costs further into ‘fixed’ costs and ‘variable’ costs.

As the name suggests, ‘fixed’ costs are business overheads you must pay at a certain rate regardless of what your business needs or does. These can include things like rent, accounting or legal fees and council business permits.

In contrast, ‘variable’ costs fluctuate depending on your usage. Examples of variable costs might include electricity, gas, fuel for your business’ vehicle, or advertising costs.

With each type of overhead cost to your business laid out, you can now track them over time in a spreadsheet. 

If your business is just starting out, you may not have this history yet so make sure to keep a record as you trade. If your business is more established, find previous bills or use your accounting records to track these costs to your business.

You can begin to reduce and manage your overhead expenses by using price comparison sites to find better deals from suppliers and being more efficient in using utilities around your premises.

Managing your overhead costs and other financial elements within your business is often a time-consuming chore but can be a powerful way to save money and grow your business. 

With Countingup, you can save time on financial admin and spend more time building your business.

Countingup is the business current account and accounting software in one app. With all your financial information in one place, it helps you understand your business’ performance more easily.

The app makes it easy to keep your account records up to date and accurate. It comes with free automated invoicing so that you can swiftly invoice on-the-go and get paid faster. 

Find out more here and sign up for free today.