One of the biggest challenges when it comes to tracking your operating costs is knowing your company’s operational overhead. Overhead can represent a huge chunk of your business’ expenses.
Overhead costs often don’t fluctuate like production costs since they are operating expenses that are independent of your production. However, they are also costs that must be paid every month or quarter, so it’s extremely important to keep track of them.
If you want to be better at tracking your operating costs, your first step is to get a handle on your overhead costs.
What Are Overhead Costs?
Overhead costs are those monthly expenses that must be paid every month to keep your business going, regardless of your level of production. The biggest chunk of your overhead costs are the rent and utilities for your facility, but overhead costs can also include things like taxes, insurance, and maintenance.
Tips for Keeping Track of Overhead Costs
One of the first things you may want to do is split your overhead costs into manufacturing overhead and administrative overhead — things like keeping machines well-maintained vs. paying human resources personnel, for example. Your main goal when tracking overhead costs, and when tracking operating costs in general, is to see where you may be overpaying and wasting money. If you can reduce a monthly expense without negatively affecting your productivity, it can pay big dividends when it comes to your bottom line.
Separating overhead costs from other operating costs is simple. If you are dealing with a fixed cost that is not directly related to production, you are talking about overhead.
A particular machine may be an operating cost but not an overhead cost — for example, the repair or maintenance of that machine, while necessary, is not directly related to production. That means it is an overhead cost. Just as if you fail to pay your rent and get locked out of your building, you cannot produce your goods. However, the building is not directly involved in the production of those goods, so it is an overhead cost.
Once you establish your overhead costs, you should consider them as a function of sales. For example, if you have 100,000 dollars in overhead costs and you sell 500,000 dollars-worth of product a month, your overhead percentage is 20 percent. That means 20 cents out of every dollar you make goes to overhead.
How to Reduce Your Overhead Percentage
To reduce your overhead percentage, you need to either increase sales without increasing overhead or decrease overhead cost without decreasing sales. The latter is usually the easier approach. You can do this with measures such as moving to a cheaper facility or renegotiating your rent, switching to solar energy or some other renewable energy source or leasing your equipment rather than purchasing it outright.
Whatever measures you take, keeping accurate track of your overhead costs as well as other operating costs are the first steps toward streamlining your business and making it more efficient and more profitable.