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Business Overhead Expenses: What They Are and How To Calculate Them

Calculating overhead can be tricky, but QuickBooks can help you calculate and monitor your business overhead expenses more efficiently and effectively.

Have you ever wondered exactly WHAT business overhead expenses really ARE?

Do you know what YOUR business overhead expenses are? Or how to go about actually calculating your business overhead expenses?

Maybe someone else has done your accounting in the past, so you haven’t been in touch with how your overhead expenses were calculated. And now you realize that it’s time get a handle on these critical numbers!

Why are these numbers “critical”? Why would you even care to know about them?

Primarily because, if you know how to calculate overhead, you can monitor and reduce your business overhead expenses and increase your profit.

But rather than digging out the calculator or entering numbers into a spreadsheet to figure things out, here’s a better idea: Use your QuickBooks accounting software to do a lot of the work for you, so you can see not only the results (in dollars and percentages), but exactly how those numbers have been built.

The best way to manage your business overhead expenses is to spend your time monitoring and managing your results, rather than crunching numbers! Start the process by getting your QuickBooks software to actually calculate your overhead for you. Then you can spend your time in the most productive possible way: by working ON your business.

Business Overhead Expenses – What Costs Are Included?

Business Operating Expenses Are Costs Related to Being Open For BusinessFirst of all, for those who may just be starting to learn how to manage their own in-house accounting system…

Business overhead expenses encompass the ongoing costs of operating a business. They include costs such as:

  • Marketing costs
  • Administrative compensation and benefits
  • Rent & utilities
  • Professional fees
  • Other general company costs such as licenses, dues and subscriptions, administrative vehicles, professional development, etc.

Basically, business overhead expenses are the costs necessary to continue operating your business, but that are not related to creating your primary source of income.

In other words, these are the costs that you have to pay in order to keep your doors open.

How To Modify QuickBooks to Calculate Business Overhead Expenses…

If you want QuickBooks (or Enterprise) to automatically calculate your actual business overhead expenses (as well as the percentage of income you are spending on business overhead expenses), follow these steps. Start with your Chart of Accounts:

  1. Review and determine which of your expense accounts are costs related to earning income. They could be “direct” costs (easily assignable to a job) or “indirect costs” (costs related to earning your income, but not as easily assignable to a job).

    For example, a direct cost would be materials you can assign to a job, while an indirect cost could be small tools or fuel costs that can’t be tracked to specific jobs.

    Confirm that those costs are sitting in the ‘Cost of Goods Sold’ (COGS) account type If you see that they’re appearing in an “Expense” account type, you should move them into the COGS account type.

  2. Review the costs now sitting in your COGS account type. Determine if any of those accounts represent business overhead expenses (as discussed above).  Be sure to move those accounts into ‘Expense’ account types.

You’ll likely want to review the results, and sort accounts within the account types, but that’s basically how to go about the process.

Now when you run your Profit & Loss reports in QuickBooks or Enterprise, you will be able to see the total amount of your overhead expenses. You will see them totaled and displayed near the bottom of your report as ‘Total Expense’.

Compare Your Business Overhead Expenses to Your Income

Show Percent of Income on reportIn order to compare overhead and profit for your business, the next step is to see how QuickBooks calculates the percentage of your overhead expense in comparison to your income. To do this:

  1. From your Profit & Loss screen, click on the Modify Report window, and select ‘% of Income’ box. Then click OK.
  2. On the screen that displays your Profit & Loss report, you’ll see that QuickBooks has divided your indirect costs (overhead) by your total income.
  3. The resulting percentage will reveal your overhead rate in relationship to income. From here, you can compare your overhead rate to others in your industry to see how you compare.

Now, you’ll be able to see how much of your income (dollars and percentage) is dedicated to paying overhead. Remember, these are the expenses that are going toward simply keeping your doors open. These expenses are not directly making you a profit.

Looking to Decrease Business Overhead Expenses and Increase Profits?

If you want to increase your profits, one way is to reduce your overhead expenses. Now that you can easily see what you’re spending on business overhead expenses, you’ll be able to look at your monthly, quarterly, and yearly results, review details, and see if you can negotiate better rates for some of those overhead expenses, such as phone services, subscriptions, marketing or rent. Maybe you can wipe out a particular cost altogether!

This shouldn’t be a one-time process! Now that you understand the process to use QuickBooks for automatically calculating overhead, you should be able to use this information to enhance your overhead and profit results on an ongoing basis.

Did This Help You?

I hope so! That’s what we’re here for: to help business owners take control of their accounting systems using QuickBooks and Enterprise – and to show them how they can use their numbers in ways that help them see more success from their business and boost their profits!

If this information helped you, check out our affordable QuickBooks subscription training series. If you’d like individual coaching or have any questions, please give us a call or send us an e-mail today.

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