Last Updated on
February 13, 2025
By
Excedr
Overhead costs are a type of business expense covering the indirect costs necessary to operate, like rent, utilities, administrative costs, insurance, and property taxes. Unlike operating expenses, which are direct business expenses tied to production, overhead doesn’t directly generate revenue but is essential for your business to function. Overhead expenses can add up quickly and impact a business’s bottom line, as they often grow with your business activity.
Operating expenses are direct costs related to producing and selling a company’s product or service. This includes manufacturing, packaging, and marketing, as well as labor costs, materials, and utilities. These expenses generate revenue and are accounted for in the income statement as operating expenses.
While some overhead costs fluctuate month to month, others require significant spending long-term. As you develop your business plan, assess which types of overhead costs are essential and where you might find cost savings.
Digital technology and automation can help reduce overhead. More businesses are embracing remote work or co-working spaces, eliminating the need for physical office space. Automation also streamlines processes, reducing labor costs and increasing efficiency, which supports cost-effective operations.
Overhead is generally divided into fixed, variable, and semi-variable costs:
In the early stages, cost-cutting is key to keeping overhead manageable, enabling funds to be directed toward growth and profit margin improvements.
Fixed expenses like rent for office space and non-sales employee salaries are some of the most significant overhead expenses. Here’s how to manage them effectively:
Minimizing facility expenses early on is essential to preserving cash flow. Purchasing full lab or office facilities can drain resources, so consider renting a single bench in an incubator or leasing a shared space that can expand as your business needs grow.
Regularly assess whether downsizing or relocating can lower your office space costs without impacting productivity. Many businesses now adopt a flexible model, reducing the need for a physical office.
Employee wages represent one of the largest overhead costs for most businesses. While downsizing can reduce immediate expenses, strategic hiring is often a more sustainable approach to cost savings. Focus on building a team with diverse skills to fill multiple roles, reducing the need for frequent new hires and keeping labor costs manageable.
Encouraging in-house growth by offering training and development opportunities can help retain talent, avoiding the costs associated with turnover and hiring new employees. Outsourcing or using freelancers for specialized roles—such as design, bookkeeping, or IT—also helps control labor expenses. Freelancers can be brought on as needed, giving you flexibility and avoiding the long-term commitments of full-time employees.
Additionally, structuring roles to combine responsibilities, especially during early growth stages, can maximize each hire’s impact. As the business grows, assess when expanding the team or converting freelancers to in-house roles makes the most sense, balancing staffing flexibility with consistency.
Administrative overhead costs can add up quickly, so taking proactive steps to streamline these expenses is crucial. Here are effective strategies:
While these strategies help free up resources for growth, it’s important to be mindful not to cut essential areas. For example, financial management roles, like bookkeeping and accounting, benefit from experienced professionals to avoid costly mistakes. Balancing cost-effective solutions with quality ensures that you’re optimizing overhead costs without sacrificing critical functions.
Equipment costs, especially for small business owners in research fields, can significantly impact overhead costs. Purchasing lab or office equipment outright drains cash reserves due to high initial costs and additional expenses like maintenance, insurance, and depreciation.
Leasing offers a cost-effective alternative, spreading expenses over manageable payments and preserving cash flow. Leasing typically includes maintenance and repairs, mitigating surprise costs and keeping equipment in optimal condition. It also allows businesses to upgrade equipment as technology advances, ensuring assets don’t become obsolete.
By leasing, companies can minimize overhead expenses and avoid large capital expenditures that don’t yield immediate returns. Leasing supports cost savings and enhances cash runway, letting businesses prioritize operating costs and business growth.
Variable overhead costs fluctuate with production levels. Examples include shipping, seasonal wages, consulting fees, office equipment repairs, and marketing.
Outsourcing part-time or contract roles is a smart way to control labor costs without committing to full-time staff expenses. Freelancers and contractors can handle specialized tasks like bookkeeping, social media management, or marketing, allowing you to meet business needs without the long-term costs of full-time employees.
For seasonal or project-based roles, use flexible contracts that align with your business cycles, avoiding unnecessary expenses during slower periods. Thoroughly vet service providers for quality and reliability, especially for critical but non-core functions like IT or legal support.
Launching a business or new product often requires increased marketing, so consider hiring someone with cost-effective strategies to maximize your ROI. If hiring in-house isn’t feasible, outsource specific tasks to freelancers or agencies to maintain a professional image without a full marketing team.
Focusing marketing spend on high-impact times, such as product launches, helps optimize your budget. Take advantage of low-cost tools like email marketing platforms and content management software to improve visibility and engagement efficiently.
Unexpected equipment repairs can strain budgets. If you own equipment, secure warranties and insurance to cover costly repairs or replacements. However, leasing may be more cost-effective, as many leasing agreements include maintenance and repairs, reducing surprise expenses.
Leasing also offers flexibility to upgrade equipment as technology advances, keeping you competitive without the financial burden of ownership. This approach helps preserve cash flow and minimizes downtime, as the lessor typically handles maintenance and replacements.
Semi-variable costs, such as utilities and sales commissions, are relatively steady but vary with business activity.
Utilities are a significant overhead cost for many businesses. To reduce this expense, invest in energy-efficient options like LED lighting, energy-saving power strips, and automated lighting controls. Transitioning to a paperless office can also cut down on office supplies and reduce printer and energy usage.
Implementing an energy management system allows you to monitor real-time energy consumption, identify waste, and make adjustments that result in lasting cost savings. Additionally, consider working in LEED-certified or energy-efficient buildings if possible, as these designs further reduce long-term utility spending.
Compensation strategies can help reduce overhead without compromising on talent retention. Flexible options like equity or incentives for employees who suggest cost-saving ideas foster a cost-conscious work environment. Offering higher base salaries with conservative commissions for sales roles can stabilize budgeting and create a more predictable compensation model.
Providing remote work options can further reduce costs tied to a physical office—such as rent, utilities, and office equipment. This approach attracts a wider talent pool, lowers business expenses, and can help boost the bottom line by reducing traditional overhead associated with in-office employees.
Depreciation is a unique overhead expense that affects your financial statements without directly impacting cash flow. It applies to fixed assets like equipment, which gradually lose value over time due to wear and technological obsolescence. This reduction in asset value is recorded as depreciation on your income statement, which lowers your taxable income and can result in tax benefits, thereby reducing your overall tax burden.
Depreciation is essential to track accurately, as it helps reflect the true value of your assets on the balance sheet, giving investors a clearer picture of the business’s financial health. By spreading the original cost of equipment over its useful life, depreciation aligns expenses with revenue periods in which the asset is used, supporting more accurate financial reporting and planning.
For early-stage companies focused on R&D, leasing equipment can be a more practical option than purchasing. Buying equipment ties up valuable capital in assets that will depreciate, impacting the business’s bottom line without directly aiding cash flow. By leasing instead, startups preserve cash reserves, which is critical for maintaining a longer cash runway and supporting ongoing operational flexibility.
Leasing also simplifies financial planning, as lease payments are predictable and often include maintenance, repair, and upgrade options, reducing unexpected expenses. This allows growing businesses to allocate more resources to growth initiatives rather than non-revenue-generating overhead costs associated with owning and maintaining depreciating assets.
For early-stage biotech founders, managing overhead costs effectively is essential to long-term success. Unlike operating expenses, overhead doesn’t directly generate revenue, yet it plays a critical role in business stability and scalability. As your company grows, so will these costs, making it crucial to adopt smart financial strategies early on.
Keeping overhead low in the early stages preserves cash flow and minimizes financial risk, especially during uncertain market conditions. Consider joining an incubator or accelerator to access shared resources, mentorship, and business planning support, reducing the burden of facility and administrative costs.
Additionally, leasing lab equipment can be a practical way to control overhead while maintaining the flexibility needed to scale efficiently. Instead of tying up capital in expensive equipment purchases, leasing allows startups to access essential technology without large upfront costs, freeing up funds for R&D, hiring, and other growth initiatives.
Exploring different approaches to overhead management—whether through shared resources, strategic financial planning, or flexible equipment solutions—can help your startup remain agile while focusing on innovation and growth.
