In business and finance, overhead refers to the indirect operational expenses that companies incur to run their business but aren't directly related to producing a product or service. Typical examples of overhead include rent, utilities, administrative salaries, insurance, and office supplies.
Understanding overhead expenses is essential because they directly affect business profitability. Unlike direct costs, overhead expenses remain relatively consistent regardless of sales volume. Monitoring and managing overhead helps businesses operate efficiently, maximize profits, and make informed decisions for growth.
Businesses typically categorize overhead into two main types: fixed and variable overhead. Fixed overhead costs remain constant, such as monthly rent or salaries, regardless of business activity levels. Variable overhead, however, may fluctuate depending on operational volume or seasonal demands.
Identifying and accurately allocating overhead expenses to different products or business units allows management to develop precise pricing strategies, monitor profitability, and maintain financial health.
Effectively controlling overhead expenses plays a critical role in financial performance. Businesses should regularly review and analyze overhead costs to identify areas of waste or efficiency, ensuring expenses align with organizational goals and supporting long-term financial stability.
