What are overheads?

I looked up a definition of overheads up on wikipedia as I am in the process of doing my business plan and I am none the wiser. It all seems to be accounting gobbledygook to me. I’ve been told it is really important that you “get to grips with your overheads” and that “if you do not understand or take control of your overheads you will be crucified”. Funnily enough nobody has actually explained what they are or how to calculate them, so would you give me a non scary, easy to understand definition of overheads?

Yours – seriously worried,

Laura

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Dear Laura,

Ah… overheads.

As the world’s first Enterprise Agony Uncle let me say you are not the first and you will not be the last to worry. The good news is overheads can be explained quite easily and the concept is easily grasped, particularly when you have the strong visual image I am about to give you. The bad news is you will worry about overheads for all the time you have a business.

The good news is overheads can be explained quite easily. Click To Tweet

So what are overheads, and why are they so important to the success of your business? First of all overheads is merely the title given to all the things you pay out on a regular basis each month. So far so simple. The next thing is they change each month, maybe not by much – but they have a tendency to creep up. I have never remembered a case of overheads creeping down. Don’t think of overheads as a thing – think of them as part of your enterprise DNA. To help you understand I am now going to give you that strong visual image.

Understanding Overheads – the ingredients

You will need a selection of books of varying weight and possibly some cheap glasses with water.

You will also need a space you can walk up and down on.

You may also wish to have a friend – actually that is a valuable addition.

Understanding Overheads – the instructions

Walk up and down the room.
Walk up and down the room quickly (you can even run if you want!). Great isn’t it?
Now, take a book and put it on your head, balanced. Now walk up and down the room.
Now add another book. Add another book and try and go faster.
If you can really get going you could now try walking with the books on your head and holding a glass of water in each hand.
At some point the whole lot will come crashing down.
This is the point you will understand overheads – for those books, glasses and whatever represent overheads. They are the costs that you have going out, that you are committed to, every day, week and month that you run your business. The most likely culprits are:

  • rent for an office or unit
  • rates for said space
  • electricity, gas that kind of thing
  • insurance costs
  • wages – yes, definitely wages. I include these because you are committed to them
  • national insurance
  • phone and broadband
  • car or van lease or payment costs
  • advertising or marketing costs
  • Anything else that maybe goes out on a monthly or perhaps quarterly basis.  Add that in.

Now total the whole lot up. That final sum is your overheads on a monthly basis. This total is the amount you have to find every month by selling your product or service (more on that topic later).

The whole point of the crashing books image is simple.  No books (overheads) and you can walk and move quickly.

Man! You are nearly flying!

Add one book and you start to slow down. Add a whole lot and… Well, you are in a Boo situation. Boo was one of the first dotcom businesses and they loaded the overheads and went spectacularly and famously bust.

I don’t know, where’s Enterprise Iain when you need him ?

Enterprise Iain
The World’s first Enterprise Agony Uncle