Adam Deering Start-Up Advice Part 3: Overheads

Adam Deering Money

Hello all, Adam Deering here.

As we continue to discuss the finer points of starting a business, this blog will pick up where we left off last time. And where my last post detailed how to go about calculating costs, this article will go into the processes involved with business overheads.

Overheads

Overheads, or fixed costs as they’ve been known to be called, are your businesses’ ongoing expenses, ranging from rent, utilities, marketing, administrative costs and more. Basically these include costs that are necessary to the continuation of your business, but that cannot be directly associated with the services of products on offer.

It’s important to calculate your monthly and ongoing overheads when starting up, accounting for all indirect expenses. Once you’ve got your head around your overheads, the total can be used to help make your business more effective.

Overhead Rate

Applying your overheads and calculating an overhead rate by dividing your indirect costs by an allocation measure can be a great practice. By comparing overheads with direct expenses such as labour hours, you can effectively price your products or services and calculate overhead rates by ratio.

Ratio

For example, if your company has a total of £100,000 in indirect costs, and you compare that with your direct labour costs of say £50,000, it would result in an overhead rate of 2:1. Now you can more accurately work out how they relate. In this case, the overhead rate would account to £2 of overhead for every £1 of direct labour cost.

Using an overhead rate is a great practice for start-ups and established businesses alike, and can help to generate long-term profit.

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Next time I’ll be discussing funding options for start-ups, and how you can raise enough money to kick-start your company or idea.

For more information and updates like this, be sure to follow me, Adam Deering, on Twitter.

(Photo:ptmoney.com)

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