2 min read
Definition
Overheads are the ongoing costs of running a business that are not tied directly to producing a specific product or sale — rent, salaries, insurance, utilities, software and administration.
In plain terms
They are the costs you carry whether you sell one unit or a thousand. Take them off gross profit and you reach operating profit — the profit from actually running the business.
Why it matters for your company
Overhead creep is a silent killer: costs that rise quietly while revenue flatlines squeeze profit. Watching overheads as a share of revenue in your management accounts catches the drift early.
In practice
For a small UK limited company, overheads tend to sit quietly in the background until someone stops to add them up. Rent on an office or unit, a bookkeeping subscription, insurance renewals, a part-time admin hire — none of these move when a particular invoice goes out, yet all of them still have to be paid whether the month was busy or quiet.
A useful discipline is separating overheads into what would disappear if the company mothballed operations tomorrow versus what would remain. Business rates, software licences and core staff salaries usually remain; discretionary spend like marketing campaigns or optional subscriptions usually would not. That split helps a director see which costs are genuinely fixed commitments and which are choices that can flex with trading conditions.
How lenders read it
When a lender reviews a set of accounts or management accounts, overheads are read alongside revenue trends rather than in isolation. A company whose overhead base has grown out of step with turnover invites more questions than one where the two move together, because it suggests the cost structure has outpaced what the business is actually generating.
Lenders also tend to look for evidence that a company understands its own overhead base — that a director can explain what is driving the largest lines and what would happen to them if trading slowed. That kind of visibility, more than the absolute size of the overhead figure, is often what distinguishes a well-run company from one drifting on autopilot.
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