What is Overhead in a small business?

Someone said she took her business plan to a bank for her practice startup loan and they asked her what her overhead was. She didn’t know, so she asked me. I’m happy to answer the question, but I should explain that it means different things to different people.

Generally speaking, overhead is the ongoing expense of operating a business. In other words, it is the total business expenses (not including any personal draw or taxes) on your cash flow statement.

Some business people equate overhead with fixed expenses. Fixed expenses are those which you must pay even if you have no patients. For example, you have to pay rent and utilities and monthly phone costs and you must make your loan payments each month. You can’t stop paying for these things if you have no patients. In my opinion, one employee is a fixed expense; that is, you must have at least one employee to help run the office, even if you have few patients. Most of your expenses are fixed, so equating overhead with fixed expenses makes some sense

On the other hand, variable expenses are those which change with sales volume. Examples of these would be office and clinic supplies which are used up faster with more patients coming in, long distance phone charges, and additional employees. Some promotion expenses might be considered variable, if they include sales promotion items you give to patients. As you can see, there are few things of any great amount that are variable.

Some experts distinguish overhead as expenses that don’t directly generate profits. So advertising would not be overhead but your liability insurance would be. In my opinion that distinction is too narrow. I’m just letting you know how others might look at the concept.

To calculate overhead, divide sales by expenses to get the percentage. Let’s say your sales for the year are $250,000 and your business expenses are $150,000. Your overhead is 60%.

I oftern get the question: What’s a reasonable overhead for a health care practice? I’d say 60% is ok, 50% is better. You probably can’t do better than 50% unless you have no loans to pay off.

If you know of someone who is operating at less than 50% overhead, I’d like to talk to that person!

For more information on business concepts, read Planning for Practice Success.