Overhead is the ongoing cost of running a business that is not directly tied to producing a specific product or service, such as rent, administration and insurance.
Overhead covers the indirect costs that keep the business operating regardless of any single sale, rent, utilities, administrative salaries, insurance, software. It contrasts with direct costs (cost of goods sold) that are tied to producing what you sell.
Understanding overhead is essential to pricing and profitability: gross margin must cover overhead before any profit remains. Businesses often analyse overhead as a percentage of revenue and watch whether it grows faster than sales, a warning sign for margins.
A consulting firm's overhead, office rent, admin staff, software and insurance, totals $200,000 a year. Its billings must exceed that overhead plus direct costs before it earns any profit.
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