What Is Overhead?

Do you know how much you are spending on overhead?⁠

Overhead refers to the ongoing business expenses not directly related to producing your product or service.

Imagine if you were still waiting on an order of materials to make your product. Production has stopped, but you still need to pay rent, payroll for your admin staff, legal, software expenses, website expenses, etc. All of those expenses are your overhead.

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Excessive overhead costs can make or break your new business. Overhead includes:

💸 Rent

💸 Office Expenses

💸 Utilities

💸 Meals and Entertainment (Leaky Faucet)

💸 Professional Fees

💸 Auto Expenses (Another Leaky Faucet)

💸 Insurance

💸 Travel

Your overhead should not exceed a certain percentage of your sales. It is crucial that you understand what that number is for budgeting purposes, but also for figuring out how much a company must charge for its products or services to generate profit. The standard is approximately 30% of your Gross Profit.

Overhead can make or break a new business. Your overhead should not exceed a certain percentage of your sales. It is crucial that you understand what that number is for budgeting purposes, but also for figuring out your price point for your products or services in order to generate profit but also be competitive in the market.⁠ The standard is approximately 30% of your Gross Profit, but if you have an excellent profit margin, these percentages can slide, but use caution. Never spend money that you don’t have yet. Use a forecast with realistic numbers and scale at a pace.

We had a client have a great year due to an unexpected deal and make huge financial commitments due to that revenue, thinking they can duplicate it the following year. They ended up at a loss the following year due to the increase in software expenses, additional staff hired, and the rental of a bigger office due to the new staff. Needless to say they were not able to duplicate the revenue numbers forcing them to get investors to keep the business afloat. Imagine splitting the pie you baked from scratch from someone who just wants to monetize your pie for their gain.

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