Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Overhead

What it is:

Overhead refers to the ongoing operating expenses necessary to running a business, but are not attributed to a specific business activity.  Also referred to as "indirect costs."

How it works (Example):

Generally, overhead expenses include expenses that do not directly generate revenues, such as labor and materials, but are needed to maintain the business operations.  Overhead expenses include expenses such as accounting, advertising, depreciation, insurance, interest, legal, rent, repairs, office supplies, taxes, information and communications, utilities, research and development, customer relations and service, and travel.  These overhead expenses are listed on the company's income statement.

Why it Matters:

Overhead costs are considered fixed costs, that is, they do not rise or fall directly with the cost of goods sold.   Overhead costs are important to monitor and control.  Since they are not directly related to revenues, they can become a larger share of the total expenses and burden a company, soaking up net income and profits.
 

Related Terms View All
  • Weak Shorts
    Short-term traders typically only enter a short position long enough to capture a quick...
  • Elephants
    CalPERS (the California Public Employees' Retirement System) is the nation's largest...
  • Maintenance Expenses
    For example, let's assume that Company XYZ is a restaurant chain. Its regular maintenance...
  • Lemon
    What constitutes a lemon?  Using the example of a car, any new vehicle that has a...
  • War Babies
    Let's assume Company XYZ builds jets for the Navy, and Company ABC builds guns for the...