What are overheads?

What counts as an overhead?

The test is whether the cost would still be there if you sold nothing this month. Rent, insurance, the phone contract, the accountant, the van lease, software subscriptions, a receptionist's wages: all of these arrive whether you had a good month or a bad one. They are overheads, sometimes called fixed costs or indirect costs.

Cost of sales is the opposite: the materials for a job, stock bought for resale, a subcontractor paid per job. Those rise and fall with sales. The line between the two is not always sharp — a tradesperson's own wages might sit on either side depending on how the accounts are drawn up — but keeping it consistent matters more than where exactly it falls.

Overheads are what gross profit has to cover before anything is left. That makes the total worth knowing precisely, because it is the amount the business has to earn in gross profit just to stand still.

A worked example

A two-person cleaning company lists its monthly overheads.

What does the total mean for pricing?

Each standard clean brings in £90 and costs £45 in the cleaner's wages and materials, so each job contributes £45 of gross profit. To cover £1,695 of overheads the company needs 38 jobs a month before it makes a penny. At 60 jobs a month, net profit is 60 times £45 less £1,695, so £1,005.

That arithmetic is the break-even point, and it is the single most useful number a small business can know. It also shows why a new overhead should be looked at in jobs, not pounds: an extra £180 a month is four more cleans, every month, forever.