How to Calculate Company Overhead

Company Overhead Calculator

Understand and calculate your business's overhead costs with this easy-to-use tool. Enter your expenses below to see your total overhead and its breakdown.

Overhead Cost Breakdown

Detailed Monthly Overhead Expenses

Expense Category	Monthly Cost	Type

What is Company Overhead?

Company overhead, often referred to as operating expenses or indirect costs, represents the ongoing costs a business incurs to keep its doors open, regardless of its sales volume or production levels. These are the expenses necessary for the business to function but are not directly tied to the creation of a specific product or service. Understanding and accurately calculating company overhead is crucial for profitability analysis, pricing strategies, and overall financial health management. It helps businesses determine the minimum revenue needed to break even and identify areas where costs can be optimized.

Who should use it? Any business owner, financial manager, accountant, or entrepreneur looking to gain a clear picture of their operational expenses. This includes startups assessing their burn rate, established companies evaluating profitability, and businesses seeking funding or investment.

Common misconceptions: A frequent misunderstanding is that overhead only includes rent and utilities. In reality, it encompasses a much broader range of expenses, including salaries for administrative staff, insurance, marketing, software, and more. Another misconception is that overhead is always fixed; while many overhead costs are fixed, some can be variable, fluctuating with business activity.

Company Overhead Formula and Mathematical Explanation

Calculating company overhead involves summing up all the indirect costs associated with running the business. These costs are typically categorized into fixed and variable overheads.

The fundamental formula is:

Total Overhead = Sum of All Fixed Overhead Costs + Sum of All Variable Overhead Costs

Let's break down the components:

• Fixed Overhead Costs: These are expenses that remain relatively constant each month, regardless of the level of business activity. They are incurred simply by operating the business. Examples include rent, salaries of administrative staff, insurance premiums, and loan payments.
• Variable Overhead Costs: These are expenses that can fluctuate based on the level of business activity or operational changes. While not directly tied to a specific product's cost of goods sold (COGS), they are still indirect costs of operation. Examples include office supplies, marketing and advertising spend (which might increase with campaigns), and some utility costs that vary with usage.

Derivation:

1. Identify all indirect business expenses: List every cost that isn't directly attributable to producing a specific good or service.
2. Categorize each expense: Determine if each expense is fixed or variable.
3. Sum Fixed Costs: Add up all the monthly fixed overhead expenses.
4. Sum Variable Costs: Add up all the monthly variable overhead expenses.
5. Calculate Total Overhead: Add the total fixed overhead to the total variable overhead.

Variable Explanations:

• Monthly Rent/Mortgage: Cost of office space or property.
• Monthly Utilities: Electricity, water, gas, internet, phone bills.
• Monthly Salaries (Non-Direct Labor): Wages for administrative, management, sales, and support staff.
• Monthly Insurance Premiums: Business liability, property, health, etc.
• Monthly Office Supplies & Consumables: Stationery, cleaning materials, etc.
• Monthly Marketing & Advertising: Costs for promotional activities, digital ads, etc.
• Monthly Software Subscriptions & Licenses: Fees for business software.
• Monthly Depreciation (Non-Asset): Amortization of intangible assets or small equipment.
• Other Monthly Overhead Expenses: Any miscellaneous indirect costs.

Variables Table:

Variable	Meaning	Unit	Typical Range
Rent/Mortgage	Cost of physical business location	Currency (e.g., USD)	$500 – $10,000+ (highly variable by location/size)
Utilities	Monthly energy, water, internet costs	Currency (e.g., USD)	$100 – $1,000+
Salaries (Non-Direct)	Admin, management, support staff wages	Currency (e.g., USD)	$2,000 – $50,000+
Insurance	Business risk coverage costs	Currency (e.g., USD)	$50 – $1,000+
Supplies	Consumables for office operations	Currency (e.g., USD)	$50 – $500+
Marketing	Advertising and promotional expenses	Currency (e.g., USD)	$100 – $5,000+
Software	Subscription fees for business tools	Currency (e.g., USD)	$50 – $1,000+
Depreciation	Amortization of non-physical assets	Currency (e.g., USD)	$0 – $500+
Other	Miscellaneous indirect costs	Currency (e.g., USD)	$0 – $500+
Total Overhead	Sum of all indirect operating costs	Currency (e.g., USD)	Varies widely
Overhead as % of Revenue	Overhead costs relative to total sales	Percentage (%)	10% – 50%+ (industry dependent)

Practical Examples (Real-World Use Cases)

Let's illustrate how to calculate company overhead with two distinct business scenarios.

Example 1: Small Digital Marketing Agency

A small digital marketing agency operates remotely but rents a small co-working space for client meetings and team collaboration.

• Monthly Rent (Co-working): $400
• Monthly Utilities (Internet, Phone): $150
• Monthly Salaries (Owner + 1 Part-time Admin): $6,000
• Monthly Insurance (Liability): $100
• Monthly Office Supplies: $50
• Monthly Marketing (Online Ads): $800
• Monthly Software (CRM, Design Tools): $250
• Monthly Depreciation (Small equipment): $20
• Other (Bank fees, subscriptions): $50

Calculation:

• Fixed Costs: $400 (Rent) + $150 (Utilities) + $6,000 (Salaries) + $100 (Insurance) = $6,650
• Variable Costs: $50 (Supplies) + $800 (Marketing) + $250 (Software) + $20 (Depreciation) + $50 (Other) = $1,170
• Total Overhead: $6,650 + $1,170 = $7,820 per month

If the agency's average monthly revenue is $15,000, their overhead as a percentage of revenue is ($7,820 / $15,000) * 100% = 52.13%. This indicates a significant portion of their revenue is consumed by overhead, prompting a review of marketing spend or potential for higher-value client acquisition.

Example 2: Local Bakery

A local bakery has a physical storefront and employs several staff members.

• Monthly Rent: $3,000
• Monthly Utilities (Electricity, Water, Gas): $700
• Monthly Salaries (Manager, Bakers, Counter Staff): $12,000
• Monthly Insurance (Property, Liability): $250
• Monthly Supplies (Cleaning, Packaging): $300
• Monthly Marketing (Local Ads, Flyers): $200
• Monthly Software (POS System, Accounting): $100
• Monthly Depreciation (Ovens, Mixers): $400
• Other (Permits, licenses): $100

Calculation:

• Fixed Costs: $3,000 (Rent) + $700 (Utilities) + $12,000 (Salaries) + $250 (Insurance) = $15,950
• Variable Costs: $300 (Supplies) + $200 (Marketing) + $100 (Software) + $400 (Depreciation) + $100 (Other) = $1,100
• Total Overhead: $15,950 + $1,100 = $17,050 per month

Assuming the bakery generates $30,000 in monthly revenue, their overhead percentage is ($17,050 / $30,000) * 100% = 56.83%. This is a common overhead percentage for retail businesses. The bakery needs to ensure its gross profit margin on baked goods is sufficient to cover this overhead and generate net profit.

How to Use This Company Overhead Calculator

Our Company Overhead Calculator is designed for simplicity and accuracy. Follow these steps to get your overhead figures:

1. Enter Monthly Expenses: Input the monthly cost for each category listed (Rent, Utilities, Salaries, etc.). Be as accurate as possible. If a category doesn't apply, enter '0'.
2. Distinguish Fixed vs. Variable: While the calculator sums all inputs, mentally categorize them. Rent and salaries are typically fixed, while supplies and marketing might be more variable. The tool provides a general explanation, but your business context matters.
3. Click 'Calculate Overhead': Once all relevant fields are populated, click the button.

How to read results:

• Total Overhead: This is the primary figure, representing your total monthly indirect costs.
• Fixed Overhead: The sum of your consistently recurring monthly costs.
• Variable Overhead: The sum of your fluctuating monthly indirect costs.
• Overhead as % of Revenue: This crucial metric shows how much of your revenue is consumed by overhead. Compare this to industry benchmarks. A lower percentage generally indicates better efficiency.

Decision-making guidance: A high overhead percentage might signal a need to increase revenue, reduce variable costs (e.g., negotiate better supplier rates, optimize marketing spend), or explore ways to decrease fixed costs (e.g., renegotiate rent, optimize staffing).

Key Factors That Affect Company Overhead Results

Several factors can significantly influence your calculated company overhead figures and their impact on your business:

1. Business Size and Scale: Larger businesses generally have higher absolute overhead costs due to more employees, larger facilities, and more extensive operations. However, their overhead as a percentage of revenue might be lower due to economies of scale.
2. Industry Benchmarks: Different industries have vastly different overhead structures. A software company might have high software and R&D costs, while a manufacturing firm has significant facility and equipment depreciation. Comparing your overhead to industry averages is vital for context.
3. Location: Real estate costs (rent/mortgage) and utility rates vary dramatically by geographic location. Operating in a major metropolitan area will likely result in higher overhead than in a rural setting.
4. Operational Model: A business operating entirely remotely will have significantly lower overhead than one with a physical storefront or large office space. Similarly, businesses relying heavily on automation may have lower labor costs but higher software/technology expenses.
5. Staffing Structure: The number of employees, their roles (administrative vs. direct labor), and their compensation packages are major drivers of overhead. High administrative salaries or a large support team will increase overhead.
6. Technology Adoption: Investing in technology can sometimes increase upfront or subscription costs (software overhead) but may lead to long-term savings by increasing efficiency, reducing labor needs, or improving marketing effectiveness.
7. Economic Conditions: Inflation can drive up the cost of supplies, utilities, and even wages, increasing variable and fixed overhead. Recessions might necessitate cost-cutting measures, impacting marketing spend or staffing levels.
8. Regulatory Environment: Compliance costs, licensing fees, and specific insurance requirements mandated by regulations can add to overhead expenses.

Frequently Asked Questions (FAQ)

What's the difference between overhead and cost of goods sold (COGS)?

COGS are the direct costs attributable to the production of goods sold by a company (e.g., raw materials, direct labor). Overhead costs are indirect and necessary for the business to operate, but not tied to a specific unit produced. Both are crucial for profitability, but they are accounted for differently.

Can overhead costs be zero?

In theory, a business with absolutely no operating expenses (e.g., a purely digital service run by one person with no software costs and free internet) might have near-zero overhead. However, for most businesses, especially those with physical locations, employees, or significant operational needs, some level of overhead is unavoidable.

How often should I calculate my company overhead?

It's best to calculate your overhead at least monthly to track trends and identify immediate issues. Quarterly and annual calculations are also useful for strategic planning and year-end financial reporting.

What is a "good" overhead percentage?

There's no universal "good" percentage, as it's highly industry-dependent. For example, a SaaS company might aim for 20-30%, while a restaurant might operate with 50-60%. Research industry benchmarks for your specific sector to understand what's typical and achievable.

Can marketing costs be considered overhead?

Yes, marketing and advertising expenses are typically considered overhead costs, specifically variable overhead, as they support the overall operation and sales efforts rather than being tied to the direct production of a single product.

What if my overhead is higher than my revenue?

This indicates your business is operating at a loss. You need to take immediate action: drastically cut costs (both fixed and variable overhead), increase revenue through sales and marketing efforts, or re-evaluate your business model and pricing strategy.

Does depreciation count as an overhead cost?

Yes, depreciation on assets not directly used in production (like office furniture, computers, or administrative equipment) is considered an overhead expense. It represents the cost allocation of these assets over their useful life.

How does overhead affect pricing?

Overhead costs must be covered by your pricing strategy. You need to price your products or services high enough to cover both your direct costs (COGS) and your overhead, while still leaving room for a profit margin. Underpricing can lead to losses, even with high sales volume.