How to control overhead costs and improve your bottom line

Running a business isn’t just about making sales—it’s about keeping an eye on the costs that keep everything running behind the scenes. Those ongoing expenses you don’t see on the sales floor? They’re called overhead costs, and while they don’t directly tie to what you sell, they’re absolutely essential.

In this guide, we’ll break down what overhead costs are, how to calculate them, and most importantly—smart ways to keep them under control without cutting corners. Let’s get into it.

What are overhead costs?

Sometimes referred to as operating expenses, overheads are ongoing costs that don't contribute directly to producing your goods or services—but are still essential to keep your business ticking. No matter how much you produce or sell, these expenses show up and need to be covered.

Overhead costs don’t include direct expenses like inventory, raw materials, or production labour—those are tied directly to what you sell.

Types of overhead costs

Overhead costs usually fall into three main categories, depending on how likely they are to change with business activity:

Fixed

Fixed costs stay the same every month, regardless of how much your business produces or sells. Whether you’re having a booming quarter or a slow patch, they don’t budge.

Examples: Renting or mortgage payments, salary and wages, insurance, depreciation, property taxes, payroll processing fees

Variable

Variable costs fluctuate with business activity. If you decide to close an office, for example, they might drop. If, on the other hand, you're going through a particularly busy period, they're likely to rise.

Examples: Shipping and handling, commissions, packaging costs, direct utility usage, advertising

Semi-variable

Semi-variable overheads sit somewhere in the middle. You pay a base amount no matter what (the fixed part), and then costs climb as your usage goes up (the variable part).

Examples: Utilities, travel expenses, salaries with overtime, equipment maintenance, phone and internet bills

Why do overhead costs matter?

Although not direct costs, overhead costs have a direct impact on some of your most important business metrics—think profitability, pricing, and cash flow. Overhead costs also affect your balance sheet, influencing your assets, liabilities, and overall financial position. In a nutshell, that's why they matter.

But what exactly does that mean?

• They affect your break-even point. The higher your overhead costs, the more you need to sell just to break even.
• They shape your pricing strategy. You need to set prices that cover all your costs—not just materials or labour.
• They help with budgeting and forecasting. Knowing your overhead costs makes it easier to predict cash flow, plan for growth, or manage slower periods with more confidence.
• They reveal efficiency opportunities. Regular overhead reviews can uncover areas where you’re overspending unnecessarily.
• They inform business decisions. From hiring to expansion to tech investments, overheads play a role in what’s realistically achievable.

And here's the kicker: overhead costs often fly under the radar. They tend to blend into the background and be seen as “set and forget,” but they can sneak up on you—and fast. That's why calculating and keeping a close eye on them isn’t just good business hygiene. It’s key for long-term sustainability.

How to calculate your overhead rate

You know the 'what,' you know the 'why'—so let's dive into the 'how':

1. List all your indirect business expenses

First, you're going to make a list of all your overhead costs for a specific period—let's say a month. Be thorough here. Go through your accounting software, bank statements, and receipts to make sure nothing slips through the cracks.

Double-check, as well, that you're only including genuine overheads. For each expense, ask yourself: "Would I still pay this if I didn’t sell a single product or service this month?"

If the answer is yes, it probably belongs on your overhead list.

2. Add up all overheads

This one's pretty straightforward. Add up all the expenses from your list—and that total is your overhead cost for the period.

3. Work out your overhead rate

Step three is a two-parter. First, you'll need to choose your allocation base—that's the metric you'll compare your overhead costs against. There's no one-size-fits-all here. The right choice will depend on your business model, but a couple of common options include total revenue (useful for product- or sales-driven businesses) or direct labour costs (better suited to service-based businesses).

Allocation base chosen, you can calculate your overhead rate using this formula: Overhead Rate = Total Overhead ÷ Allocation Base.

Let's put this all into practice. Say your monthly overheads total $10,400 and your monthly revenue total $28,000. Using the formula: $10,400 ÷ $28,000 = 0.37, or 37%. This means 37% of your revenue goes towards covering overhead costs.

What is considered a good overhead percentage? 

As a rule of thumb, you don't want your overhead rate to be over 35%.

That said, a high overhead isn't always a red flag. In certain cases, like early-stage startups or companies investing heavily in growth, it's completely normal. What matters most is whether your overheads are sustainable and delivering value.

So, going back to the scenario we looked at before, where your rate came in at 37%. This figure might be perfectly reasonable, depending on your industry or growth stage. But if your margins are tight or cash flow is under pressure, it’s worth taking a closer look.

Tips for reducing business overhead costs

Rule number one of keeping overheads under control: monitor them regularly. But what if they're too high?

1. Outsource certain tasks

Ah, the power of outsourcing. Chances are, there are tasks you’re currently handling in-house that could be done more efficiently—and more affordably—by a third party. Think IT support, bookkeeping, payroll processing, or customer service.

Outsourcing these functions can help you reduce employment and software costs—all without sacrificing quality. You can focus your internal resources on what you do best and let specialists handle the rest.

2. Go hybrid (or fully remote)

Since COVID, many companies have adopted a hybrid model—where employees go into the office a few days a week, and work from home the rest. Fewer people in-office means lower utilities, office supplies, and cleaning costs—which all help reduce overheads. You can also get a smaller office or opt for a coworking space.

Want to go a step further? You could ditch your office space altogether and go fully remote. It’s not the right move for every business, but if your team can operate just as effectively from home, it's something to consider.

You save money on overhead costs, your employees save money (and time) on commuting—and everyone wins.

3. Negotiate with your suppliers

Some of your suppliers or service providers could be willing to give you better terms, and you don't even know it. If you've built long-standing relationships, this is a conversation worth having.

Or, if you're onboarding new vendors, consider negotiating multi-year contracts—they often come with discounts, fixed pricing, or added value you won’t get with shorter-term deals.

4. Go paperless

You may have never asked yourself, "How much am I actually spending on paper?" And look—it might not be a huge number on its own, but it all adds up. Shitfing into a digital-first approach where possible can cut down on costs tied to paper, printing, storage, and even office space.

5. Optimise software subscriptions

Do you really need three different project management tools? Or that premium plan you use once or twice a year? Most businesses have active software subscriptions quietly eating into their overheads without adding any real value.

To avoid this, do a regular audit of your tech stack and:

• Cancel what you don’t use
• Downgrade what you don’t need
• Consolidate where you can

6. Use financing strategically

We know what you might be thinking. "Reducing costs by... taking on debt?" Contrary to popular belief, not all debt is bad. The right business loan can actually be a game-changer for SMEs wanting to get overheads under control.

For starters, it can give you the breathing room to invest in upgrades that make your operations more efficient. Think: better equipment, updated tech, or automation of fiddly manual tasks.

Finance can also help you take advantage of cost-saving opportunities you might otherwise miss. Say a supplier offers a discount for bulk orders—with a short-term loan in place, you can say yes and save in the long run.

When cash flow’s tight, and overheads start to feel even heavier, a line of credit or overdraft can be a real lifesaver—helping you avoid late fees, penalties, or last-minute spending that only adds to the pile.

What are the consequences of not accounting for overhead costs?

By now, you’ve probably got the idea—but just to recap, not accounting for overhead costs can put you at risk of:

• Selling your products or services at a loss without realising it
• Inaccurate budgeting and cash flow planning
• Missing signs of rising costs, which could lead to overspending and reduced profitability

Overhead cost FAQs

Can you deduct business overhead costs from taxable income?

Yes, most overhead costs are deductible because they’re part of running your business. Things like rent, utilities, and office supplies usually count. Just make sure you keep good records and check with your accountant or tax advisor to confirm what applies to your specific situation.

Can overhead costs be eliminated completely?

Short answer: no. Overheads are the essential costs that keep your business ticking, so they can’t be cut out entirely. But the goal is to manage them smartly—cut unnecessary expenses, find more efficient ways to operate, and keep overheads as lean as possible without sacrificing quality or growth.