Am I spending too much on overhead?
Rent, insurance, software, admin salaries. Overhead is the cost of keeping the lights on. Here's how to figure out if yours is eating too much of your revenue.
The short answer
Is your overhead too high? Calculate your overhead ratio: total overhead expenses divided by total revenue. For most service businesses, anything above 35% is a warning sign. For product businesses, the threshold varies but the trend matters more than the absolute number.
Overhead is the silent margin killer
You added a $200/month CRM tool last March. A $150/month project management platform in June. Bumped your office lease by $400 in September. Each one felt small. Together they added $9,000 to your annual overhead, and your revenue didn't grow enough to cover it.
Overhead creeps. Unlike direct costs that scale with jobs, overhead costs stick around whether you are busy or slow. That $9,000 in new fixed costs means you need $9,000 more in gross profit just to stay where you were. If your gross margin is 60%, you need $15,000 in additional revenue to break even on those additions.
The danger is not any single expense. It is the accumulation of small ones that never get reviewed. Most business owners add overhead regularly and almost never subtract it.
Your overhead ratio and the categories behind it
You need two things: your total overhead expenses (everything that is not direct cost of goods sold) and your total revenue. The ratio between them tells you how much of every dollar goes to keeping the business running versus delivering the product or service.
How to calculate your overhead in QuickBooks or Xero
- 1Run your Profit and Loss report
In QuickBooks, go to Reports and search for Profit and Loss. Set the date range to the current month. In Xero, go to Accounting → Reports → Profit and Loss.
- 2Identify your overhead categories
Overhead is everything in the Expenses section that is not Cost of Goods Sold. This typically includes rent, utilities, insurance, office supplies, software subscriptions, admin salaries, professional fees, and depreciation.
- 3Calculate your overhead ratio
Add up all overhead categories. Divide by Total Income. Multiply by 100. Example: $31,000 overhead / $92,000 revenue = 33.7% overhead ratio.
- 4Compare to last month and 3 months ago
Re-run the P&L for the previous month and for 3 months ago. Is your overhead ratio going up, staying flat, or improving? The trend is more important than the absolute number.
- 5Flag categories that grew more than 10%
Look at each overhead category. Did any grow more than 10% from the previous period while revenue stayed flat or grew less? Those are the categories to investigate.
Total time: about 15 minutes if your books are current. The tricky part is correctly separating overhead from direct costs, which depends on how your chart of accounts is set up.
Track your overhead ratio monthly to catch creep early
A single month's ratio can be misleading. What matters is the 3-month and 6-month trend. If your overhead ratio has been climbing for 3 consecutive months, something needs to change before it becomes structural.
Or see your overhead breakdown automatically every month
Bottomline connects to your QuickBooks or Xero account and calculates your overhead ratio every month. It breaks down overhead by category, flags anything that grew significantly, and shows you the trend over time.
You don't need to manually separate overhead from direct costs or build a spreadsheet to track trends. Bottomline does the categorization, calculation, and comparison every month so you can spot overhead creep before it erodes your margins.