Overhead.
aka indirect costs, operating overhead, fixed costs
The costs of keeping the lights on that don't belong to any one product.
What it actually means
Overhead is the ongoing cost of running a business that cannot be tied directly to a specific product, service or customer. Think rent, utilities, insurance, accounting, IT and management salaries. These costs exist whether you sell a lot or a little, so they have to be covered by the profit from everything the business sells.
The key split is direct versus indirect. Direct costs go straight into what you sell: the flour in a bakery's bread or the hours a designer bills to a client. Overhead is everything else that keeps the business open. Much of it is fixed, meaning it stays the same whatever your sales, like a lease. Some is semi-variable, like electricity that rises a bit when you are busier. Because overhead is not tied to one product, companies often allocate it, spreading it across products or teams using a rule such as floor space, labor hours or share of revenue.
That allocation produces an overhead rate. If a workshop has $20,000 of monthly overhead and 2,000 billable hours, it might add $10 of overhead to every hour it prices. Get this wrong and you can underprice everything without noticing. The nuance people miss is that overhead is not automatically bad. A finance team, a good office and solid IT are overhead too, and they can make the rest of the business work better. The real question is whether overhead grows faster than the revenue it supports.
Where you'll hear it
Our overhead jumped when we took the second floor. Unless sales grow to match, every product now has to carry a bigger share of that rent.
Translation: fixed costs went up, so each sale now needs to earn more just for the company to stay in the same place.
Also in pricing discussions, where overhead is added to direct costs to set a minimum price, in charity reports, where people often ask what share of donations goes to admin, in government contracts that allow an overhead rate on top of direct costs, and in cost-cutting plans that target central functions.
The pop-culture version
Picture four people sharing a flat. Rent, wifi and the electricity standing charge are due every month, whether anyone cooks, studies or is away for a week. Those bills are not caused by any one person's activity. They are the cost of having the place at all.
Groceries are different. If you cook a curry, you pay for the ingredients. That is a direct cost. The shared bills get split by some rule, maybe equally, or by room size, which is exactly what companies do when they allocate overhead.
Nobody would call rent and wifi a waste. Without them there is no flat. But if the group upgrades to a bigger place with fancier internet while everyone's income stays the same, each person feels it. Overhead is fine. Overhead that outgrows what pays for it is the problem.
The practical rule: when you price something or judge whether it is profitable, include a fair share of overhead, not just the direct costs. And when overhead rises, ask what extra revenue or efficiency it is meant to bring.
Say it like you mean it
“The product looks profitable on direct costs, but once we allocate its share of overhead it barely breaks even.”
It recognizes that real profitability depends on covering indirect costs, not just the cost of making the product.“Overhead is basically waste, so we should cut all of it.”
Much overhead, like rent, insurance and accounting, is essential, and cutting it blindly can damage the business.You will also hear "lean" or "low overhead" used as praise for businesses with modest fixed costs, and overhead absorption, the accounting method for assigning indirect costs to the products a company makes.
An in-depth look at identifying, allocating and controlling overhead costs so they support pricing, efficiency and long-term competitive strength.
Decoded next
Decoded by the Kurums editorial team. Kurums Decoded translates the language of business for people who are new to it. Definitions are kept short on purpose; the serious version above goes deep. Nothing here is financial, legal or career advice.
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