How do you calculate overhead costs for a small business?

Posted by Damian Roberti on October 13, 2022

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It doesn't matter if you own a restaurant, bar, or catering company; overhead expenses are one of the most expensive aspects of owning and operating a small business. You may increase your profits while simultaneously lowering your expenses if you keep track of your overhead expenditures and look for ways to reduce them financially. We will educate you on the many types of overhead expenditures as well as the ways in which your company can reduce those costs in order to make more money and raise its profit margin.

How much does it cost to have overhead?
A cost that must be paid by your company but does not directly relate to the production of a good or the performance of a service is referred to as an overhead cost. You may also refer to "overhead charges" or "overheads" when discussing "overhead."

To assist you in remembering what "overhead" refers to, visualize the costs associated with maintaining "over your head" necessities such as lighting and a roof. Even if you shut down your company for a week and didn't sell any products or services during that time, you would still be responsible for paying the building's rent and utilities.

How do you calculate overhead costs for a small business?
Therefore, what kinds of expenses do not qualify as "overhead" costs? The salary of employees who help market your products or services are not included in the costs of running your business. Neither is the cost of the raw materials that are used to create the items. Businesses that operate in the food service or hospitality industries do not count the cost of food or labor as part of their overhead expenses, unless those expenses are for administration or accounting.

Some examples of overhead costs include the following:
There are different kinds of overhead expenses associated with each sector of the economy, but the following are typical for most businesses:

Rent or mortgage: It is most likely that the amount you pay toward either your rent or mortgage each month constitutes the bulk of your out-of-pocket costs.
Utilities: The cost of utilities such as electricity, water, gas, internet service, and sewer is the next greatest overhead expenditure after rent and mortgage payments.
Insurance: Each and every kind of insurance policy that you purchase to guard your company is included in the category of your overhead costs.
The expense of acquiring permits and licenses for your company is considered an overhead cost. This applies to both the physical and digital forms.
One of the expenses that you have to pay each month is the property taxes that you owe.
Some Salaries: The salary of staff like as office managers, accountants, and lawyers are included in the category of overhead expenditures.

How do you calculate overhead costs for a small business?
over-the-head
There are three distinct categories of overhead costs, namely fixed, variable, and semi-fixed. Continue reading to learn more about the following costs:

The term "fixed overhead" refers to charges of operating expenses that do not vary over time. No of how well your company operates, you will always be responsible for the fixed overhead expenditures. Rent and insurance are two examples of expenses that are considered to be fixed overhead expenditures.
Costs of running the business that become more variable as the company expands are referred to as variable overhead costs. If you have a greater number of customers, you will probably need to perform additional maintenance on your various pieces of equipment. One kind of variable overhead is the expense of repairing broken pieces of equipment.
The term "semi-variable overhead costs" refers to expenses that have a set base amount but also an additional cost that rises as the company's level of activity does. The cost of utilities is an example of an overhead expense that is only partially fixed.

How to Calculate Your Monthly Bills and Fees
The calculation of overhead costs is done once a month the vast majority of the time, but it can also be done once a day, once a week, or once a year if desired. After you have determined the total amount of your overhead costs, you will be able to evaluate the many methods available to you for cutting those costs and achieving cost savings.

1. Make a list of everything that you are responsible for paying for.
To begin calculating your expenses for the month, you should start by compiling a list of everything that requires cash from you. On this list, include things like the rent, the taxes, the utilities, the equipment, the office supplies, the upkeep, the advertising, and the repairs. To determine how much it costs you each month to run your company, compile all of the associated expenses and add up the total.
2. Determine the percentage of the costs that are overhead.
The percentage that represents the overhead cost can be expressed as a ratio of the total amount spent on overhead to the total amount of revenue. To calculate the percentage of costs that are considered overhead, use the following formula: Overhead costs as a percentage of total monthly sales times 100 represents the total amount of overhead as a percentage of sales.
There is a wide range of variation in the typical percentage of overhead costs from industry to industry, with certain businesses falling at either extreme end of the spectrum.

How do you calculate overhead costs for a small business?
Restaurants, on average, are responsible for paying 35% of the expenditures associated with their operations. On the other hand, the proportion of a retail company's revenue that goes toward overhead expenses is more like 20–25 percent.
Regardless of how prosperous your company is, you should never lose sight of the fact that you need to pay your overhead expenses. There are several expenses that, despite the passage of time, do not alter significantly, such as rent and salary. However, expenses such as those for utilities, repairs, and advertising might see significant shifts in a relatively short period of time. Keeping track of the monthly overhead costs incurred by your restaurant can provide valuable insight into the health of your business.
Onward and Upward

Tips for Reducing Expenses in the Back Office
The majority of the costs associated with running a business are considered to be fixed expenditures; nevertheless, there are actions you may take to reduce your overhead expenses. A significant impact can be made on your bottom line by engaging in cost-cutting negotiations with suppliers and landlords or purchasing equipment with a lower energy footprint.
In order to reduce the overhead costs of your company, follow these steps:
1. The renegotiation of a rental agreement
If the lease for your restaurant is on a month-to-month basis, you should discuss renegotiating it with your landlord. Your company provides a consistent stream of money for your landlord, and if you intend to remain there for an extended period of time, they may be ready to work with you to negotiate more favorable lease terms.
2. Rent out your restaurant space

How do you calculate overhead costs for a small business?
These days, renting out your kitchen space to others is becoming both more frequent and easier to do. After normal business hours or very early in the morning, you might make your site available for rent as a commissary kitchen to enterprises like food trucks and catering services that require a space to prepare food.
3. Share using the modal window that appears.
Try letting pop-up eateries use your space part time. Pop-up restaurants are transient eating establishments that can be discovered in a variety of locations, including parks, art galleries, warehouses, and even the private homes of individuals. Many chefs utilize pop-up restaurants as a way to enhance their talents, discover potential investors, and determine whether or not customers would be interested in them opening full-time establishments. These restaurants spread the word about themselves through the use of social media. Because pop-up restaurants aren't always located in conventional settings, they frequently need to use the kitchen of another restaurant or business in order to prepare their meals. During your off hours, you might provide this service to customers.

4. Save money on supplies and equipment
Equipment is both a significant financial investment and a significant portion of the overhead expenditures that restaurant operators must bear. Find an online retailer that sells commercial equipment and provides benefits such as member discounts or free shipping, and then make your purchase there. Every time you make a purchase at WebstaurantStore using your Webstaurant Rewards® Visa Business Card, you will be rewarded with a certain number of points. This results in additional cost savings for you.
Check out these additional money-saving suggestions for purchasing restaurant equipment:

Invest in Newer Models Replacing older appliances with newer models will help you save money on maintenance as well as on your monthly energy bill. This is because many of the newer models come equipped with features that reduce energy consumption.
Choose versions that are less harmful to the natural world. It's possible that energy-efficient appliances will cost more upfront than their standard counterparts, but the money you'll save on your monthly utility bills will more than make up for the difference over time.

How do you calculate overhead costs for a small business?
Pick something from the "Scratch and Dent" area of the menu. New things that have been slightly damaged, such as being scratched or dented, are sold at a discount at the Scratch & Dent shop. The damage has little effect on how well the equipment functions, and the consumers won't be able to detect any minor imperfections on the exterior of the product.
Consider a multi-function oven, which includes: Convection, steam, and a combination of the two are the three methods of cooking that are available in combi ovens. Because of this, you may prepare a wide variety of cuisines using just a single piece of kitchen equipment. Due to the fact that combi ovens offer a wide variety of cooking options, it is possible to purchase just one instead of several more expensive equipment.

5. Reduce the amount you spend on your utility bills.
The use of home equipment that consume less energy is an excellent method for cutting costs associated with utilities, but there are additional things that can be done to cut costs even more.

In any room that is not currently being utilized, the lights should be turned off. If you choose energy-efficient lighting, such as LED light bulbs, you could see further reductions in the cost of your power bill. How do you calculate overhead costs for a small business?
Invest in components for your dishwashing station, such as pre-rinse spray valves and faucet aerators, to reduce the amount of water needed for the washing process.
Customers shouldn't be given water until they specifically request it from you.
Throwing away one or two glasses of water might not seem like a big deal, but when added up over the course of a month, that can amount to a significant amount of waste.

You shouldn't store an excessive amount of food in your refrigerators and walk-in coolers. The movement of cool air through these appliances is essential to their operation. When there is not enough room for air to circulate, the refrigerator cannot function properly. Because of this, the machine will have to work harder to maintain the desired temperature, which will result in an increase in the cost to you.
Turn off the dishwasher before going to bed.
The water in the tank of many high-temperature dishwashers is maintained at an appropriate temperature by heating elements that are an integral part of the tank.

6. To promote your company, make use of various social media platforms.
Because the prices of advertising are included in the overhead expenditures of your company, utilizing marketing strategies that are free can help you bring in more money. Utilizing social media as a channel for mobile marketing is a fantastic method to expand one's audience. You can encourage more people to visit your eatery by sharing photos and videos of the delicious food that you serve on social networking websites such as Facebook, Twitter, and Instagram.
You are able to inform clients about new items that have been added to the menu, daily specials, and future events at your establishment by using social media. If you engage in conversation with your consumers and provide answers to the questions they have, you will be able to reach out to all of their followers and connections, which may result in an increase in business.

How do you calculate overhead costs for a small business?