What are overhead costs?
Overhead costs are the ongoing operational expenses a business incurs that are not directly tied to producing a specific product or delivering a specific service. Also referred to as indirect costs or overheads, these expenses must be paid regardless of the level of business activity or output.
Overhead costs are reported in the operating expenses section of the profit and loss (P&L) statement and can significantly affect a business’s profitability if not carefully managed.
Common examples of overhead costs
- Rent and utilities: Office or commercial space, electricity, water, and internet
- Salaries and wages: Permanent staff in management, administration, and support roles
- Insurance: Business liability, workers’ compensation, and other applicable policies
- Marketing and advertising: Ongoing promotional campaigns and agency fees
- Professional services: Accounting, legal, and consulting fees
- Office supplies and equipment: Stationery, computers, and software subscriptions
- Licenses and permits: Ongoing regulatory and business licences
Fixed vs. variable overheads
Overhead costs can be either fixed or variable:
- Fixed overheads remain constant regardless of output, such as rent or annual insurance premiums
- Variable overheads fluctuate in line with business activity, such as utility bills that increase during busier periods
Why overhead costs matter
Understanding and managing overhead costs is essential for maintaining profitability and setting competitive pricing. If overheads are too high relative to revenue, the business may struggle to generate net profit even with strong sales.
For Australian small businesses, regularly reviewing overhead costs — and identifying areas to reduce or consolidate — can meaningfully improve cash flow and financial resilience. Common strategies include renegotiating lease terms, outsourcing non-core functions, and switching to more cost-effective software solutions.