How do you calculate overhead for a small business?
Overhead is the cost of keeping the business operating even when a specific customer job is not happening. Knowing it matters because underpriced work can look profitable before overhead is included.
Common overhead expenses
Examples can include insurance, phones, software, shop or office rent, bookkeeping, advertising, vehicle costs, licenses, office supplies, non-job-specific tools, and recurring administrative costs.
Keep direct job costs separate
Materials, subcontractors, rentals, disposal, freight, permits, or other costs that only exist because you accepted a particular job are generally more useful to track as direct job costs. Mixing them into overhead can distort the hourly target.
Convert monthly costs to annual overhead
If recurring overhead averages $4,000 per month and annual-only expenses total $6,000, annual overhead is about $54,000.
Spread overhead across realistic productive capacity
One useful approach for service businesses is to divide annual overhead by annual productive hours. That shows how much overhead every productive hour must help carry before owner pay and profit are considered.
Overhead percentage is another view
You can also compare overhead with revenue. If overhead is $54,000 and annual revenue is $300,000, overhead equals 18% of revenue. That ratio can be useful for trend monitoring, but it does not replace job-level pricing math.
Review overhead when the business changes
A new truck, employee, shop lease, software stack, or insurance increase can materially change the amount each productive hour needs to produce.
See what overhead does to your required rate
JJL's free Profit Checkup combines overhead with owner income, productive hours, direct costs, and a profit cushion.
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