Small Business Budgeting 101: How to Factor in Overheads

For small business owners, startup entrepreneurs and serial enterprise creators, budgeting is absolutely essential for the smooth and gentle progression of your business from strength to strength.

Budgeting, of course, involves watching what you spend and what you earn and balancing your books to ensure that you’re always in the black, with a little cash cushion to support you in case a situation arises in which your business requires an injection of capital.

Factoring in your overheads is an equally important part of the budgeting system and one which will be the focus of the points provided below. You need to be aware of what overheads are, where they can be dangerous to your budget, and how to stay on the right side of your budget through adequate overhead management.

“People are accustomed to thinking of accounting as dry and boring, a necessary evil used primarily to prepare financial reports and survive audits, but that is because accounting is something that has become taken for granted.” ― Eric Ries, The Lean Startup: How Today’s Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses

What are Overheads?

Overheads are the costs that your business encounters which are intrinsic to the sound operation of your business. They’ll usually come from a centralized source of capital, and they’ll support the general operation of your business. Examples of overheads might include:

  • Labor costs
  • Property rental and maintenance
  • Utility use; water, electricity, internet
  • Insurance and other regular payments
  • Raw materials or supplies
  • Interest rates on business loans

Depending on the size, scale and industry in which your business operates, you may have all or none of these overheads. In any case, one of the tricky factors in overhead management is that, as you’ll see from the above bullets, they can vary. Yes, you’ll pay a constant fixed rate of rent, but the maintenance and utility bills will likely differ from one month to the next. This uncertainty leads us to the first tip regarding overhead management.

1. Acknowledge Flexibility

Overheads aren’t reliably set in stone month after month and quarter after quarter. Indeed, for small businesses, they’re always going to be changing as the company expands and develops. It’s in this sense that you should draw up a long list of your overheads, and work out a maximum and a minimum figure that your combined overheads will fall into.

Once you have this figure, let’s say it’s between $20,000 and $30,000, you’ll be able to draw up your budget. Always plan with the highest number in mind; if your overheads turn out to be far closer to your minimum expectations, then you’re able to pocket some additional profits, or to reinvest them in your business, encouraging it to grow. This threshold will mean that you’re never caught out by a sudden increase in your overheads that you felt was unforeseeable. You’re a small business manager, and as such you’re responsible for foreseeing such economic setbacks.

2. Spreadsheets and Analytics

A business’ overheads are directly subtracted from their profits. That’s how profit margins are worked out, and it’s this relationship that you’re going to try to make as efficient and profitable as possible when monitoring your business’ overheads.

Make spreadsheets noting down your overheads. Take a comprehensive look over every cent and dollar you’ve spent in the past few months, categorize them into areas of overhead expenditure, and crunch the numbers in a pie chart to see exactly where you’re spending all your money. Just visualizing your spending can be helpful for future planning.

Then it’s time to analyze. Where are you spending too much and might you be spending too little in certain areas, also? What might you be able to bring down steadily over the next few months, and how can you explain a higher-than-expected utility bill for last month? Analysis is a massive part of efficiency savings, which smart overhead management naturally leads to.

Efficiency Savings

Now you have your comprehensive list of overheads and a breakdown of how much each has been costing you per week, month or quarter; it’s time to find ways to reduce every factor. There are some costs that you’ll be hard-pressed to reduce, like rent and wages, but most areas of business expenditures can be rehashed following analysis. Here are three ways in which you can achieve this:

  • Renegotiation: Once you’ve found the weak spots in your current budget, you’ll be able to leverage them when renegotiating aspects of your business. An excellent example of this is your supply chain: you can renegotiate a lower price based on statistics of expenditure that you’ve uncovered.
  • Behavior Change: There are many forms of behavior in business that can lead to unnecessary overhead increases. If you have a company credit card for drinks, lunches, dinners and business trips, it might be time to put a cap on its use. Or, if you run a large office, ensure you’re energy efficient at all times.
  • Maximum Efficiency: Finally, there are the components of your business that you’re paying for, but which are not necessarily operating at their peak efficiency. The best example of this is perhaps your staff. You’re paying a sizable wage bill to them; they should be repaying this overhead through quality, diligent work.

By keeping abreast of your overheads, you’ll be able to target small areas of your business where a slight change in your operations will create a genuine cost saving that you’ll be able to carry with you long into the future of your business.

Tax Deductions and Breaks

Most small businesses across the world benefit from some kind of incentivization for them to grow and compete against some of the biggest players in the market. Ordinarily, this comes in the form of government-driven tax breaks and deductions that reduce the overhead costs of companies that need that little bit of extra cash to reinvest and to grow. It can also come in a cash advance which will help you reduce your overheads.

You should be making sure that you’re well aware of the amount of tax you’re expected to pay, and you should add this as an overhead to your spreadsheet. After all, it’s an unavoidable cost, and avoiding it will put your whole enterprise at peril.

Equally, though, you should also be aware of the deductions you’ll be able to apply to your business’ finances; many of which are linked to overhead costs like equipment purchasing and property rent. There a breaks for industrial equipment financing to make your company more efficient, for instance. Make inquiries so that you’re able to reduce the amount of tax you’re compelled to pay in your fledgling years.

Final Thoughts

Overhead management is a crucially important part of a successful business operation. By keeping abreast of your overheads, you’ll be ensuring your company is operating at the efficient peak of its abilities, striving from strength to strength.