What is overhead and why should you try to reduce it?

Darryl Bachmeier
Mar 24, 2019

Overhead is the total expenses paid by the business. It is the expenses paid to keep the business running day-to-day. There is no way of getting around it. It must be paid for the business to generate any profit.

What makes up overhead?

Rent, wages, insurance, legal fees, supplies, taxes and utilities are all examples.

Overhead costs can be grouped into either administrative or manufacturing. Administrative overhead includes anything that supports other areas of the business some of this includes admin staff wages, office equipment, supplies and travel expenses.

Manufacturing overhead re all costs in order to create a product or service. These costs are much more visible. They can also be grouped by location. Wages for production staff i.e. plant workers, deprecation, taxes, rent, utilities are all examples.

Overhead is used for budgeting. It allows a business to figure out how much to charge consumers for product or service in order to cover costs. Overhead are costs that are not directly related to specific business activity. Overhead is often fixed and does not typically change from one month to the next.

Overhead allows determining break-even costs. Operating expenses on the other hand depend on production. As production, changes operating expenses change while overhead remains stable. Overhead must be paid even if your company produces nothing.

How to reduce overhead

Good business practice means a need to control costs. It is important to look at the areas that have the largest impact. One of the largest especially for small business is employee wages. This is not to say you should start dropping wages, employees are a valuable asset to your company. What is important is to increase productivity of employees through better training and better processes. Start by measuring the effectiveness of employees. Manage employees better especially when they are scheduled to work.

You can also reduce overhead by eliminating the optional nice to have things but do not contribute any real value to the company. Look for ways to use more technology and automate as much as possible. Remove time-consuming tasks. Find substitutes products and services or look at alternative suppliers that offer lower prices. Ask for discounts from your supplies. Most importantly do not pay late fees or bank fees if you can at all avoid them.

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