Overhead, often called overheads, is the ongoing cost of running a business that can't be traced to one product, job or activity, such as rent, admin salaries, utilities and insurance. Corporate Finance Institute (CFI) points out you pay it whether your products are selling or not.
That last part is what makes overhead different. Sell nothing this month and the rent's still due, the receptionist still gets paid and the insurance still renews. Overheads support everything the business does to earn revenue, without being tied to any single sale.
Overhead vs operating expenses
CFI draws a line here that trips a lot of people up. Unlike operating expenses, overheads can't be traced to a specific cost unit or business activity. They support the overall revenue-generating side of the business rather than one part of it. I've written a separate guide to operating expenses, so I'll stick to overhead here.
Why overhead decides what you charge
The insight most owners don't connect is this one. CFI says overhead costs are important in working out how much a company must charge for its products or services to make a profit. Every price you set has to carry a share of the costs that never show up on an individual job.
CFI's example is a vehicle retailer that pays premium rent for a showroom in a good location. That rent doesn't belong to any one car, but every car sold has to help pay it. If the retailer priced each car on the vehicle's cost alone, the showroom would quietly eat the profit. It's the same reason markup and margin aren't the same number.
The three types of overhead
CFI sorts overheads into three groups, depending on how they behave as activity rises and falls.
| Type | How it behaves | CFI's examples |
|---|---|---|
| Fixed | Stays the same every month, whatever you do | Salaries, rent, property taxes, depreciation, government licences |
| Variable | Rises and falls with activity | Shipping, office supplies, advertising and marketing, consultancy charges, legal expenses, maintenance and repair |
| Semi-variable | A base charge plus a part that moves with usage | Sales commissions, vehicle usage, utilities such as power and water |
Semi-variable is the type people forget. Your electricity bill has a standing charge you'll pay at zero usage, plus whatever you use on top. Treat it as fully fixed or fully variable and your numbers will be slightly off every month.
Six common overhead costs, with CFI's examples
- Rent. Payable monthly, quarterly or yearly. If you buy the property instead, CFI says you book depreciation rather than rent.
- Administrative costs. The salaries of a receptionist, accountant or cleaner, plus audit fees, legal fees and entertainment. CFI counts them as overhead because they don't directly produce profit but keep the business running.
- Utilities. Water, gas, electricity, internet, sewer and phone.
- Insurance. Property insurance against flood, damage or theft, and professional liability insurance for firms such as accountants and law firms.
- Sales and marketing. Promotional materials, trade shows, paid adverts, salespeople's wages and sales commissions.
- Repair and maintenance. For businesses that rely on vehicles and machinery, such as distributors, parcel delivery, landscaping, transport and equipment leasing.
Where to cut overhead first
CFI gives a few practical levers. When sales are slow, a business can negotiate its rent or move to cheaper premises. Utilities can often be brought down by negotiating lower rates with suppliers. Administrative costs can be reduced by moving staff to part-time, hiring on contract, cutting items such as entertainment and office supplies, or, at the hard end, laying people off.
I'd start with the variable and semi-variable lines, because they're the ones you can change this month without breaking a lease or a contract.
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Working out your overhead in five steps
- List every cost that isn't tied to one product, service or job.
- Sort each one into fixed, variable or semi-variable.
- Add them up for a normal month.
- Spread that total across what you sell in a month, so you can see what each sale has to cover. This step is how I'd apply CFI's point about pricing; CFI doesn't give a formula for it.
- Look for the variable lines you can trim first.
Where I come in
Sales and marketing sits on CFI's list of overheads, and for a lot of small businesses it's the line that grows quietly: a tool here, an agency retainer there. I work with small businesses and SaaS marketing teams on getting more from what they already spend on marketing before they add anything new. You can see how I work on my work with me page.
My verdict on overheads
Overheads are what you pay while nothing's selling. Know that number before you set a single price, because it's the floor your prices have to clear. If you've ever felt busy but broke, check whether your prices carry your overheads at all. The next thing I'd read is how to price services without undercharging.
Frequently asked questions
What is overhead in business?
It's the ongoing cost of running the business that can't be traced to one product or activity. CFI says you pay it whether your products are selling or not.
What are the three types of overhead?
CFI lists fixed overheads such as rent and salaries, variable overheads such as shipping and marketing, and semi-variable overheads such as utilities with a base charge plus usage.
Is overhead the same as operating expenses?
Not quite. CFI says that unlike operating expenses, overheads can't be traced to a specific cost unit or business activity.
Why does overhead matter for pricing?
CFI says overhead costs help determine how much a company must charge for its products or services to make a profit.
How can a business reduce overhead?
CFI suggests negotiating rent or moving premises, negotiating lower utility rates, and cutting admin costs through part-time or contract staff and fewer extras.
