Welcome back, you creative entrepreneur you!
Today we’re going to talk about a special category of your business’ expenses, which we shall call “overhead”. Not in the sense that this topic goes right “over your head”, but just that in accounting-ish terms, we call them “overhead expenses”.
What is an overhead expense?
An overhead expense can be defined as any expense your business incurs to design, create, or manufacture your product that is not directly traceable to an individual product. Side note – For the most part, the concept of overhead expense applies only to businesses that create a physical product, not those that provide a service or virtual product.
If you were running a giant factory and creating widgets, your overhead expenses would be things like the rent, utilities, wages to pay your factory workers, insurance, marketing fees, advertising, and machines. These are all costs that are vital to keeping your business running. Without them, you would not be able to make your widgets, but you can’t exactly trace an exact dollar amount to your finished products…like how much of your electricity bill helped generate that one widget? We don’t have time to figure that out. We’ve got stuff to make!
Your small biz has overhead expenses too. You probably spend money on lots of things that keep your business running smoothly, yet these expenses are not directly, easily traceable to every item you create. If you go back to our post about your business’ expenses, the expense categories like indirect supplies and materials costs, tools, machines and other items used, and all of the non-product costs can be considered overhead expenses for your business.
In my humble opinion, one of the biggest mistakes Etsy entrepreneurs and other artisans make is not taking these overhead expenses into account when pricing their goods. Remember there are three main benefits for knowing your total expenses – measuring profitability, deducting on your tax return, and pricing accurately.
The biggest mistake most people unknowingly deal with is the third item – pricing accurately. And the mistake they make is forgetting to include all their expenses, mostly their overhead expenses, into their pricing formula.
You should always try to recoup a little piece of your overhead expenses in every sale you make. Pricing your goods is a complex topic for another day, but let’s sum up by saying that you need to be thinking of the most sensible way to include a tiny portion of your overhead expenses in the price of each and every item you sell.
We’ll talk about a few practical ways to do this next time. In the meantime, become aware of your overhead expenses. Start making a list of the ones you know your business has and ones you might have in the future. Start recording them in your bookkeeping system. Ask yourself if you include them somehow in the way you price your goods. Becoming aware of them is our first step toward better pricing and thus bigger profits! Woohoo!
All information on this site is provided for general education purposes only and may not reflect changes in federal or state laws. It is not intended to be relied upon as legal, accounting, or tax advice. We strongly encourage you to always consult with a tax or accounting professional about your specific situation before taking any action. Please read our full disclaimer regarding this topic.