Overhead Cost: Meaning, Examples and How to Calculate

Understanding the meaning of “overhead cost”—what it includes, what it doesn’t, and how it affects your pricing or profit margins—is a crucial part of running a healthy, sustainable business. It’s all about keeping a close eye on your money: what’s coming in, what’s going out and where the gaps might be.

But while most business owners know exactly what they’re spending on stock or hiring a freelancer for a client job, it’s harder tracking the expenses that keep the lights on in the background.

Whether you’re just getting started or trying to boost profitability in an established company, getting to grips with overheads gives you more control over financial decisions and helps avoid common traps like undercharging or overcommitting.

So, what exactly is meant by overhead costs?

Let’s jump in.

What does overhead cost mean?

Overhead costs are the ongoing expenses needed to run your business, regardless of how many sales you make in a week or month. They aren’t tied to specific jobs or products, they’re simply the cost of keeping things operational.

Think of overheads as the background hum of your business. Even if you stopped trading tomorrow, you’d still have business rent, utility bills, insurance and product subscriptions (think Microsoft, Adobe, Zoom). 

Well, those are your overheads. 

You need them for your business to function, but they don’t directly generate income.

Let’s take an example. A self-employed architect might spend money on:

• CAD software subscriptions
• Professional indemnity insurance
• A co-working desk or office lease
• Marketing and website hosting

None of these are tied to a single client or job, but without them, it’s not a viable business.
It’s worth knowing overheads come in three broad types:

• Fixed overheads: these stay roughly the same every month (e.g. rent, insurance, internet)
• Variable overheads: change depending on use or scale (e.g. electricity, travel)

• Semi-variable overheads: partly fixed, partly flexible (e.g. phone bills, software plans with usage tiers)

These distinctions help when budgeting or scaling, especially if your income fluctuates seasonally.

What are overhead costs vs expenses?

One common area of confusion, especially for newer businesses, is how overheads differ from general expenses. After all, both involve money going out, and both show up in your accounts.

But there’s a key difference.

All overheads are expenses, but not all expenses are overheads.

In other words, expenses is the umbrella term. Overheads sit underneath it, alongside direct costs. What separates them is whether the cost is tied directly to delivering your product or service.

Let’s say you run a boutique cake business. If you buy flour and eggs to complete a client order, that’s a direct cost. It only exists because of that job. But if you pay for website hosting or a phone line, that’s an overhead. You’d pay regardless of how many cakes you sell that week.

Keeping the bakery as our example, here’s a comparison.

The key takeaway? 

Direct costs: specific and tied to a job.

Overheads: general and ongoing.

This distinction matters when setting prices or calculating profit margins. If you don’t factor in overheads, your business might look profitable on paper, but cash flow tells a different story.

What’s an example of an overhead cost?

Examples of overheads vary from business to business, but there are some classic categories most companies will encounter. These include costs such as premises (literally keeping the roof overhead), utilities, software, insurance and marketing.

Ask yourself whether any of the following apply to your business:

• Premises costs: rent, business rates or mortgage payments for your office or workspace.
• Utilities: electricity, gas, water, waste collection or recycling contracts.

• Technology and software: broadband, phone lines, cloud storage, productivity tools and product subscriptions (like Microsoft 365, Slack or Quickbooks).

• Insurance: from product liability to office insurance, employer’s liability or specialist van cover.

• Marketing: paid social ads, website hosting, SEO tools or brand consultants.

• Administrative salaries: including finance, HR, PA support or directors who aren’t client-facing.

• Accountancy and legal fees: for regular services (such as your accountancy firm or ongoing legal subscriptions), not specific disputes or one-off projects.

It’s worth noting different industries have unique overheads. For instance, a construction firm might pay for yard space, heavy vehicle insurance and plant hire. On the flip side, a photography agency might spend more on software, coworking spaces and brand positioning.

The common thread is these costs exist even if no clients walked through the door that week.

What’s not considered an overhead cost?

Now we’ve covered overhead cost meaning and examples, it’s just as important to understand what doesn’t count as overheads.

Many business owners mistakenly treat every outgoing as an overhead, which can skew your budget.

For example, costs commonly mistaken for overheads include:

• Raw materials or goods you resell
• Client-specific subcontractors
• Commission-based pay tied to performance
• Travel directly billed to a project or job
• One-off costs linked to a specific sale or order
• Staff salaries for the entire business

These are all expenses or direct costs.

As a rule of thumb: if you wouldn’t pay for it without a specific job, sale or client, it’s not an overhead.

Do overheads include salaries?

While we’re on the topic, this is a tricky area. Yes, overheads can include salaries. But there are exceptions.

Admin staff, finance officers, HR teams and directors working on business operations are usually included in your overheads. This is because their role supports the business as a whole.

On the other hand, salaries for people working on specific projects or output (like a kitchen porter in a catering business, or a sound technician in a media studio) aren’t overheads. Those are direct labour costs.

For very small businesses or sole traders (where one person wears many hats), things get more complex. Say you’re a freelance marketing professional. You might spend half your time delivering client work and the other half managing accounts, chasing invoices or updating your website. 

In this case, you can allocate a percentage of your salary to overheads based on how you split your time. For instance, if around 40% of your time is spent on admin and business development, you might list 40% of your salary as an overhead and the remaining 60% as a direct cost.

How do I calculate my overhead costs?

Once you know what counts as an overhead, the next step is working out how much you’re actually spending—and whether it’s proportionate. By this, we mean: are the costs sustainable for your business?

Start by listing every recurring cost in your business that isn’t linked to a specific sale or job. That might mean digging through bank statements, invoices or accounting software.

Then, follow these steps:

1. Group costs into fixed, variable and semi-variable: Fixed costs (i.e. those generally staying the same each month) are easy to plan for. Variable ones need more careful forecasting.
2. Exclude direct costs: Strip out anything that only arises when you deliver work. Things like materials, freelancers, delivery or project-based software will likely fall under this category.

1. Work out your total overheads for a set period: Add up all your overhead costs for a specific time frame. Monthly is common, especially for keeping tabs on cash flow. But you could also calculate quarterly or annually if that suits your business. The key is consistency, so you can spot patterns, track evolving costs and make informed decisions.

1. Break it down further: This is optional, but you might want to group overheads into categories (e.g. premises, marketing, technology) for easier comparison over time. This will also help you understand where possible savings lie. More on this later.

Let’s take a real-life overhead calculation example.

Here are your outgoings for a month:

• £800 on premises rent
• £150 on insurance
• £100 on broadband and utilities
• £300 on software and subscriptions
• £650 on admin salaries
• £1,000 on materials to fulfil an order
• £200 on travel to a client project meeting

The materials and client-specific travel wouldn’t fall under overheads—because these are tied to completing specific projects or jobs.

So, once these are removed, your monthly overhead is: £2,000.

Now, if your monthly revenue (or turnover) is £8,000, your overhead ratio would be:

(2000 ÷ 8000) × 100 = 25%

This tells you 25% of your income is needed just to keep your business operational.

What’s a reasonable overhead cost?

So, what’s sensible to aim for when it comes to business overheads?

There’s no universal “right” number. The appropriate overhead ratio depends on your business model, growth stage and sector. For instance, a business starting out might have a higher overhead ratio before income catches up. Equally, a business that relies heavily on automation or digital products may have lower overheads than one with physical premises and staff. 

But understanding what’s normal for your industry can help you benchmark. For example:

• A digital consultancy with remote staff may have overheads below 20%.

• A high-street café with rent, utilities and front-of-house wages may hover around 40%.

• A light manufacturing firm may sit closer to 10–15%, thanks to lower admin spend and higher material costs.

You should also consider:

• Whether you’re scaling or steady: Growth periods often need more upfront overhead investment (for instance, new staff, equipment, premises) while you’re building your brand and your sales.
• Your pricing structure: Are you building in enough margin to cover your overheads without eating into profits? For example, if you charge flat fees for project work, check they reflect not just the time spent but also costs like software subscriptions, admin time and insurance.

• Your risk appetite: Some businesses prefer “lean models” with minimal overheads to stay flexible. For example, a freelance graphic designer may avoid fixed office costs to keep prices competitive. Others may take on higher overheads to scale faster—like a gym investing in equipment and a high-street presence. It depends on your comfort with financial risk and your long-term goals.

What’s a good overhead percentage?

As we’ve seen, lower isn’t always better when it comes to overheads. If you cut costs too much, you could end up stretched too thin, missing chances to grow, or without the right insurance cover. 

The real aim is keeping your overheads in proportion—not just shrinking them.

That said, many established businesses aim to keep overheads around 35% or less. It depends on your setup, though. Start-ups or service-led businesses might run higher, while e-commerce or manufacturing businesses often come in much lower.

Most businesses calculate their overhead percentage based on total revenue, but it’s also worth looking at overheads in relation to gross profit. This gives a clearer picture of how efficiently your business is running, especially if your cost of sales (the direct costs tied to delivering your products or services) changes from month to month.

Keeping an eye on these ratios (and breaking them into categories) helps you spot issues early. Maybe your software costs have crept up, or new staff haven’t brought in as much business as expected. Picking up on trends like this makes it easier to make positive, proactive decisions for your business.

How can I reduce my overhead costs?

To wrap up, let’s tackle one of the most common questions. If your overheads feel too high (or just not delivering value), what’s the best way to bring them down? It’s important to remember that cutting overheads doesn’t mean cutting corners. It’s ensuring your regular outgoings are genuinely supporting your business, rather than quietly eating into profits.

Here are some smart starting points:

• Audit your subscriptions: Many businesses have unused or duplicated tools quietly auto-renewing each month. Check your bank statements or accounting software for forgotten platforms. For example, you might find you’re still paying for two separate design tools when one will do.
• Compare utility providers: Don’t stick with outdated broadband or energy tariffs out of habit. Switching to a more competitive rate can offer significant savings with minimal disruption.

• Go hybrid or remote (if appropriate): If your team doesn’t need a full-time office, consider co-working spaces or part-time leases. For instance, moving to three in-office days a week could cut rent and utilities in half.

• Negotiate with suppliers: Whether it’s insurance, IT support, cleaning services or printing, most suppliers are open to renegotiation—especially if you’re renewing or bundling multiple services.

• Outsource smartly: Hiring a freelancer for a few hours a week (for example, to manage your social media or bookkeeping) can be more cost-effective than employing someone full-time, particularly if the workload varies.

• Streamline your tools: Using all-in-one platforms can help you cut overlapping subscriptions. For example, something like Google Workspace combines email, file storage, video meetings, team chat and shared calendars in one place.

And when it comes to business insurance, check you’re not over-insured (paying for cover you don’t need) or under-insured (risking major costs later). At Howden Insurance, we regularly help clients fine-tune their insurance to reflect the real shape of their business—saving money while staying properly protected.

Final thoughts: why tracking overhead costs matters

Overhead costs might not be the most exciting part of running a business. But they’re one of the most important. These often overlooked expenses affect everything from your pricing and profit margins to your risk level and cash flow. 

In simple terms, overheads are the costs of keeping your business running, whether you’re making sales or not. Think rent, insurance, admin staff, software, utilities. They’re essential, but left unchecked, they can quietly drain your resources.

Whether you're scaling up, tightening your margins, or simply aiming for more financial clarity, tracking overheads puts you back in control. It gives you the insight to make smart decisions, avoid nasty surprises and grow with confidence.

Because when you understand overheads, you’re not just spending—you’re steering.

At Howden Insurance, we help businesses of all sizes get the cover they need. No more, no less. If you're unsure whether you’re overpaying or missing key protections, talk to us about a tailored quote that fits your business today.