Ongoing business expenses that are not directly tied to producing goods or services but are necessary to keep the business running.
What are Overhead Costs?
Overhead costs are the recurring expenses a business must pay to operate, regardless of its level of production or sales. These costs do not directly generate revenue but are essential for day-to-day operations. Examples include rent or lease payments for office or warehouse space, utilities, insurance, administrative salaries, professional services (such as accounting or legal), office supplies, and equipment maintenance.
Overhead is generally divided into categories such as fixed overhead (costs that remain the same each month, like rent), variable overhead (costs that fluctuate depending on business activity, such as shipping or utilities), and semi-variable overhead (costs with both fixed and variable components, like a phone bill with a base rate plus usage charges).
Managing overhead is an important part of financial planning because high overhead costs can reduce profitability, even if sales are strong. Businesses often calculate their “overhead rate” to understand how much of their revenue goes toward these indirect expenses.
For non-U.S. founders operating a U.S. business, overhead costs are especially relevant when budgeting for operations in another country, as these expenses may include both U.S.-based obligations (such as registered agent fees or virtual office costs) and home-country operational costs.
In summary, overhead costs keep the business running behind the scenes and must be carefully monitored to ensure they do not consume too much of the company’s revenue.
