Determine your overhead expenses
1. Create an Excel spreadsheet or open an accounting software account to track your monthly expenses.
If you’re tracking your expenses manually, create a spreadsheet in Excel to stay on top of the data. Search Microsoft’s database of Excel templates for numerous downloadable business expense spreadsheet templates. Alternatively, sign up for a free or budget-friendly accounting software account. Examples include: QuickBooks Online. Zoho Books. Sage Accounting. FreshBooks.
2. Make a list of all of your indirect business expense categories.
Common examples of indirect costs include: Rent . Taxes. Office equipment and office supplies. Utilities. Advertising and marketing expenses. Accounting and legal expenses. Insurance. Travel. Salaries and wages. Depreciation. Government fees and licenses. Property levies. If you’re using accounting software, most platforms automatically categorize your expenses into the above categories. Consult the guidelines for your specific software provider for more guidance. If you’re tracking this manually, review all financial statements, invoices, and receipts to ensure you aren’t missing any indirect expenses.
3. Enter your monthly costs for each indirect business expense category.
If you’re using accounting software, most software platforms will do this automatically for you. If you’re using a manual spreadsheet: Make a new column in your budget spreadsheet for each month you’re tracking. For example, in the spreadsheet row for accounting expenses, you might have 12 columns, one for each month of the year. Review all receipts, credit card statements, and other financial documents to see the exact amount you spend every month in each expense category. Add each individual payment or fee together to get your total monthly expenses for each expense category. Enter the total monthly amount to the appropriate business expense row and monthly column in your spreadsheet.
4. Add your monthly overhead costs together to calculate your aggregate overhead costs.
If you’re using accounting software, most software platforms will do this automatically for you. If you’re using a manual spreadsheet: Scroll down to the bottom of your spreadsheet. Click the spreadsheet cell at the bottom of your first monthly totals column. Hit the sum formula in Microsoft Excel or Google Sheets. Ensure all the cells in the monthly column are highlighted. Tap enter on your keyboard. You now have your aggregate overhead costs for the entire month. This is your general overhead expenses, and this may be enough information for you to work with. However, most businesses take it a step further and use the overhead expenses to calculate their overhead rate.
5. Determine your overhead rate by dividing your monthly indirect costs by your monthly activity driver.
Your overhead rate tells you how much it costs you in overhead for every activity your business does. Overhead rates are typically expressed in dollar amounts. The industry standard for calculating this is: Indirect Cost ÷ Activity Driver = Overhead Rate If you prefer to determine your overhead rate in percentages instead of dollars, use this formula instead: Indirect Cost ÷ Activity Driver x 100 = Overhead Rate Percentage For example, let’s say you manage a sales team, and you’re determining your budget for the next quarter. Your sales team had $175,000 in indirect costs and made $325,000 in sales for the month. Your calculation would be: $175,000 ÷ $325,000 = $0.54 ($175,000 ÷ $325,000) x 100 = 53.84% In other words, your sales team spends $0.54 in overhead for every $1 that they make in sales. Expressed as a percentage, 53.84% of your sales goes into overhead.