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What are Overhead Expenses?

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  • Written By: B. Miller
  • Edited By: Andrew Jones
  • Last Modified Date: 29 August 2016
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Overhead expenses are also known as operating expenses, and they refer to the money spent running a business; some people also use this phrase to refer to the money they are forced to spend to have a job. For instance, an individual might consider the purchase of a wardrobe, dry cleaning, and putting gas in the car as as overhead expenses for working outside the home. Otherwise, in the business world, overhead expenses tend to refer to things such as rent for a business location, payments for utilities and supplies, or paying wages and benefits for employees.

It is important to plan for overhead expenses when starting and operating a business. These expenses do not directly contribute to business income, such as purchasing and reselling products, but they are undoubtedly vital to business operation and need to be incorporated into a business plan. Start up businesses often find that hiring an accountant or financial advisor to help estimate and plan for overhead expenses is necessary, because they can often be substantially higher than expected. Many businesses need to create separate budgets for each category of overhead expenses, and stick very stringently to those budgets. A skilled office manager should be able to help identify any excessive expenditures, and reduce them by shopping around for better deals on office supplies and necessary services that the business uses.

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Housing expenses, so to speak, are often a considerable overhead expense for a new business. These expenses may include rent, or even a commercial mortgage payment if the company has purchased the building. In addition, some buildings may need remodeling, or the purchase of display units or cubicle dividers depending on the nature of the business. Utilities such as electricity, heat and hot water, and telecommunications like Internet and phone bills are other examples of overhead expenses that can get quite high. Some of these can be deducted on a tax return, and an accountant can provide the best advice with this.

Of course, some individual people who work outside of the home, or work as freelance contractors from a home office have overhead expenses as well. These expenses are similar, but it may require the additional purchase of office supplies or other items for a home office. Overhead expenses for having a job outside of the home might include child care expenses, or funds required in order to put gas in the car every week. Purchases of a uniform or specific clothing for the workplace might also constitute an overhead expense. In truth, all of these usually represent a slight loss of income from the job, because they all represent money that must be spent in order to earn.

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