The Most Common Overhead Costs for Small Businesses

Businesses exist to provide a product or service to their customers. However, it costs money to do that. These expenses are called overhead costs. In a perfect world, your business will earn more money than it pays out in costs, resulting in profit. 

Because we don’t live in a perfect world, small business owners must keep a close eye on their overhead costs. Doing so can help you spot overspending and correct your course on the fly. Not sure what your overhead costs are or how to control them? We’ve got you covered.

Overhead costs most small businesses face

Overhead costs are expenses that you incur during day-to-day operations. These costs don’t directly generate income, but they’re incredibly important to running a successful business. One example is the cost of electricity to your business location. Without it, you couldn’t do anything else, but it doesn’t directly generate income. You’ll also incur these costs regardless of your ability to generate profit, meaning that you’ll need to find a way to cover them even during lean times. What are the most common overhead costs small businesses face? We’ll break them down into three different categories: fixed, variable, and semi-variable.

Fixed

Fixed costs are exactly that — you pay the same amount every month regardless of other factors. For instance, if you have a small business loan with a fixed interest rate, you’ll pay the same amount every month no matter what. Other fixed overhead costs include property taxes, software subscription fees, location rent, salary costs, property taxes, business insurance costs, and more. 

Don’t be misled here. “Fixed” doesn’t mean that those costs will never change. Property taxes can go up or down. Insurance costs can also change. They’re called “fixed” because they don’t change based on usage or profitability. This means that these costs are predictable, but they’re not entirely static.

Variable

Variable costs are those that rise and fall based on what your business does each month. Many of your overhead costs fall into this category. Because they’re variable, they’re much harder to predict, and many will increase or decrease based on related factors. For instance, you might pay more for particular marketing activities in one month, which then increases the number of calls your business receives, thereby requiring employees to work overtime to handle the influx of leads. 

So, what overhead costs fall into this category? We’ve already touched on two: overtime and marketing. There are tons of others, and they can vary greatly depending on your industry, time of year, and other factors. Some of the most common include legal expenses, consultation fees, shipping costs, salesperson commissions, office supplies, and administrative costs all fall into this category. 

Semi-variable

Semi-variable overhead costs are more predictable than variable costs, but less than fixed costs. Usually, these are costs that reoccur every month, but the amount may change from billing period to billing period. You can budget for them, but you’ll rarely know precisely how much you’ll need.

Some of the most common overhead costs for small businesses in this category include utilities (electricity, water, sewer, gas, etc.), hourly pay for employees, fuel for company vehicles, travel expenses, and more. 

How to calculate your overhead costs

Not sure what you’re paying in overhead costs each month? While the amounts will vary, there’s no need to operate completely in the dark. First, list all your overheads. These are anything that does not directly affect the production of products or services. Next, add up all the expenses. Finally, divide this number by your total monthly sales, and then multiply that number by 100. This gives you the percentage of your income going to overhead costs.

The actual formula looks like this:

(Total overhead costs per month/monthly sales) x 100 = overhead percentage of income

How to control overhead costs for small businesses

While you can’t avoid overhead costs entirely, you can do many things to help reduce and control those costs. Here are some of the best ways to do that.

• Audit your software subscription costs. Often, you’ll find that you’re paying for software you don’t really use, or that there are cheaper or free options that do the same thing.
• Focus on variable costs, like office supplies and business travel, by making key adjustments in your planning and resource usage. For instance, going paperless could dramatically reduce the costs of office supplies. Or, booking travel well in advance can save money on flights.
• Automate tasks with low value and high costs. Lean on software as much as possible.
• Evaluate your marketing expenditures and ensure that you’re spending money only on things that truly move the needle.

Outsourcing can save you money, time, and sanity

One truly effective way to reduce your small business’s overhead costs is to outsource what you can. In many cases, this can dramatically improve your productivity, because it allows you to focus on revenue-generating tasks while ensuring that trained professionals handle mundane aspects of everyday operation. 

A prime example is hiring a team of virtual receptionists. At Smith.ai, our experienced, North America-based virtual receptionists can act as your 24/7 answering service, as well as handle lead screening and intake, appointment booking, and payment collection. We automatically log calls, chats, and appointments in your CRM and block spam and sales calls. It’s never been easier to start controlling your overhead costs.

To learn more, schedule a consultation or reach out to hello@smith.ai.