Understanding Accountancy Terms: Overheads

Overheads are costs which you incur in order to run your business, but they aren’t directly related to the product or service you provide. They’ll appear on your profit and loss statement, and can have a big impact on the financial health of your business, so in this article we answer some of the most commonly asked questions about overhead expenses.

What are overheads?

Overheads are the costs you incur in order to keep a business running. It’s important to keep track of these costs so you can make sure your business stays as efficient as possible. You might also be able to claim tax relief on them as allowable expenses – helping to reduce your tax bill!

What are examples of overhead costs?

The type of business you run will determine what your overheads are. They’re a bit different to other sorts of expenses, and are more to do with what it costs to run the business. For example, a jeweller may need a physical store to reach their customers, so the cost of renting premises will be one of the overheads which enable them to operate effectively. Other examples could include:

• Business insurance
• Utility bills
• Accounting and legal services
• Cleaning and maintenance

Are there different types of overheads?

Yes! There are three different types of overheads:

• Fixed costs
• Variable costs
• Semi-variable costs

Fixed costs

Fixed costs, as the name suggests, pretty much stay the same every month. Typical examples of fixed costs in a business include things like rent, website hosting services, and business insurance.

These overheads usually remain the same regardless of how busy or successful your business is (unless you grow so much you need to take on larger premises, and pay more rent!). They are predictable, so you’ll pay the same amount every month.

Variable costs

Variable overheads are regularly recurring costs that fluctuate over time, usually relating to how busy you are as a business. For example, a restaurant’s water usage will change depending on how many customers it serves over time, so its water bill will change depending on the number of diners it has each month. Other typical examples of variable overheads include utilities, such as gas and water bills.

Semi-variable costs

Semi-variable overheads are somewhere in-between variable costs and fixed costs. You’ll generally pay a predictable set amount on a monthly basis, unless you exceed a limit.

A great example of a semi-variable cost is your phone bill. You pay a fixed contract charge every month, but you’ll be charged extra if you exceed your data or call limit.

Will my overheads affect my tax bill?

Yes they can, because overhead costs are often allowable expenses which you can claim tax relief on when you submit your tax return, helping you to lower your tax bill.

 
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