Overheads are the costs required to run your business that aren’t directly related to the product or service you provide. Your overheads will appear on your profit and loss statement.
In this article, we answer some of the most commonly asked questions about overhead expenses.
What are overheads?
Overheads are included in the costs you incur to keep a business running. They are not related to the gross profit, but are related to profits on the whole and will reduce any taxes. Reduce your overheads, increase your profits!
They are critical to ensuring you can keep your doors open and continue to sell or provide your products or services to your customers.
What are examples of overhead costs?
The type of business you run will determine what your overheads are. For example, a jeweller may need a physical store to reach their customers, therefore store rent will be one of their overheads to enable them to operate effectively.
Depending on your business, there are many different overheads you may need to consider. Examples of typical overheads include:
Accounting and legal services
Cleaning and maintenance
What are the different types of overheads?
There are three different types of overheads:
Fixed costs are as you’d expect, they stay the same every month. Typically, fixed costs include things like rent. Other examples of fixed overheads include website hosting services and business insurance.
These overheads remain the same regardless of how busy or successful your business is. They are predictable, so you’ll pay the same amount every month.
As the name suggests, variable overheads are regular recurring costs that fluctuate over time. This is usually related to how busy you are as a business. For example, a restaurant may use different amounts of water depending on how many customers they serve.
The restaurant’s water bill will change depending on the number of diners it has each month. Common variable overheads are utilities, such as gas and water bills.
Semi-variable overheads are somewhere in-between variable costs and fixed costs. You’ll generally pay a predictable set amount on a monthly basis, unless you exceed a limit.
A great example of a semi-variable cost is your phone bill. You pay a fixed contract charge every month, but you’ll be charged extra if you exceed your data or call limit.
How do overhead expenses affect tax?
Overhead costs are often allowable expenses. These reduce the amount of profit that you make. Because tax is calculated on profit, less profit means less tax.
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About The Author
I'm an AAT and ACA qualified Chartered Accountant with over 13 years experience working with businesses, contractors and sole traders. I also love watching live music, and quizzes!
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