Overhead is the ongoing cost of running a business that is not directly related to producing a good or service. They start at a baseline number and increase proportionally based on usage, such as with utilities. They are also typically charged a fixed amount to be connected to the grid, which must be paid regardless of usage. With Xero accounting software you can track overhead expenses, manage stock, and monitor the financial health of your business with ease, helping you to keep your overheads low and sales high.
Office and retail space is a major expense, especially in Singapore’s business districts. Review your current setup and see if you can reduce or relocate office or commercial space where possible. Many businesses pay for software and other subscriptions they don’t actually use, need, or even realise they have.
In some sectors, business expenses are categorized as overhead expenses or general and administrative (G&A) expenses. For government contractors, costs must be allocated into different cost pools in contracts. Overhead costs are attributable to labor but not directly attributable to a contract. G&A costs are all other costs necessary to run the business, such as business insurance and accounting costs. Overhead is a term used to describe business expenses that aren’t directly linked to creating a product, service or any other activity that contributes to a company’s income. While some business overhead is unavoidable, reducing these indirect expenses will help widen your profit margin.
- See if you can renegotiate your contracts or switch to providers and suppliers with lower rates.
- Examples of operating expenses include materials, labor, and machinery used to make a product or deliver a service.
- For government contractors, costs must be allocated into different cost pools in contracts.
Other Overhead Cost Examples
Many larger companies offer a range of benefits to their employees such as keeping their offices stocked with coffee and snacks, providing gym discounts, hosting company retreats, and company cars. All of these expenses are considered overhead as they have no direct impact on the business’s goods or services. Perks can range from variable costs like performance-based bonuses to fixed costs like holiday parties or special events.
What expenses are not overhead?
- FreshBooks expense tracking software offers an easy way to keep track of your overhead costs.
- For example, a business could cut their overheads by shopping around for a cheaper insurance provider, or choosing to use a more affordable accountancy service.
- You might also consider letting employees work remotely or in a hybrid setup to cut down on the space needed.
- The two primary ones are administration and production, although companies may add extra categories to be more specific.
An overhead expense is a business expense not directly attributed to creating a product or service. Some common examples of overhead costs companies must assume are rent, utilities, administrative costs, insurance, and employee perks. Overhead costs are the indirect expenses required to run your business.
If the soda company increases production, for example, it will have to pay more for electricity. In the scenario with the soda bottler above, the facility lease payments are still owed even if no current production takes place within the facility. Likewise, the company still incurs other business expenses, such as insurance payments and administrative and management salaries. Fixed overheads are indirect costs that stay the same over a set period, no matter how much your business activity increases or decreases. They do not fluctuate with daily operations, making them predictable expenses.
An example of a semi-variable cost is utility usage because a business has a baseline cost of electricity to keep operations running; this is the fixed portion of the expense. However, when the weather changes and more electricity is required for temperature control, utility expenses rise; this is the variable portion of the expense. Marketing and other expenses incurred to sell the product are also included in overhead expenses. For the soda bottler, this includes commercial advertisements, signage in retail aisles, and promotional costs. These costs remain even if production is shut down for a short period of time. Overhead encompasses the essential expenses that keep your business running smoothly, even if they don’t contribute directly to production or service delivery.
Non-core functions that are not part of a company’s competitive advantage can often be performed more efficiently and cost-effectively by external providers. IBM, for example, after conducting a value analysis, decided to outsource its PC manufacturing to Lenovo, leading to significant savings in overhead costs. Rent is payable monthly, quarterly, or annually, as agreed in the tenant agreement with the landlord. When the business is experiencing slow sales, it can reduce this cost by negotiating the rental charges or by moving to less expensive premises. Your overhead rate is how much money you spend on overhead compared to how much revenue you generate.
Company cars
Whether opting for cloud-based accounting software or a fintech business account, you can reduce manual admin and gain better visibility into your finances. Common overhead cost examples might include your rent, insurance, and admin costs. Effectively managing these costs ensures your business remains competitive, operationally efficient, and financially stable.
Employee salaries
Another type of insurance is professional liability insurance that protects the business (such as an accounting firm or law firm) from liability arising from malpractice. Other types of insurance include health insurance, home insurance, renter’s insurance, flood insurance, life insurance, disability insurance, etc. Utilities are the basic services that the business requires to support its main functions. Examples of utilities include water, gas, electricity, internet, sewer, and phone service. Here’s how to calculate the current ratio, a financial metric that measures your company’s ability to pay off its short-term debts.
Overhead expenses relate directly to the product or service the business produces, but not to one specific project. For example, a construction company might have a manager that oversees all of the projects the company is currently working on. Theoretically, if the company didn’t have any projects in the works, they could let her go and not incur the expense. Overhead includes everything it costs to run a functioning business, from rent to payroll to business licenses to accounting fees and many other costs that vary from business to business. These costs are necessary to run the business but do not directly contribute to producing goods or services. Many administrative costs, like office salaries, are fixed costs and therefore predictable.
Explore whether sole proprietors in Singapore can hire employees or work with independent contractors, as well as business expansion options. These audits can identify areas of waste, inefficiency, and overpayment, leading to actionable insights for cost reduction. Kirstie is a freelance journalist writing in the tech, startup and business what is a business overhead spaces for publications including Sifted, UKTN and Maddyness UK.
Overhead, also known as operating expenses, are the routine costs incurred by a business that isn’t directly tied to a specific business activity. Unlike direct costs, which can be directly traced to a product or service, overheads encompass all the behind-the-scenes expenses that keep the business wheels turning. Understanding and managing overhead costs is fundamental to the financial health and operational efficiency of a business.