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Overhead


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Overhead. What exactly is overhead? How does it work and what should I expect it to be. I understand all shops are different, but there should be an expected similarity in similar types of business. Thanks for your help and insight.

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Overheads are any expenses that are not directly atributable to a job, such as insurance, rent, electricity, admin staff wages, building repairs, repairs, insurance, rego, fuel, loan/lease repayments for company vehicles, workers comp, superannuation, staff ammeneties, office supplies, taxation penalties, business loan interest, accountancy fees legal fees etc, etc etc.

Costs directly attributable to a job (costs of goods manufactured) would be direct labour (ie labour actually involved in manufacturing the job), materials, consumables (gas, electrodes, etc) engineeering supplies (nuts bolts, grinding discs, etc) surface coatings (paint galvanising sandblasting etc) heat treatment, freight/transport, etc etc etc.

These 2 cost structures will be different for every business as thingmaker implied, if you are a large shop you may have a receptionist, a sales manager, workshop manager, general manager, staff ammeneties with cleaning costs also accounted for, company cars, for your senior staff, OHS costs, insurance, workers comp. On the costs directly side you would have materials, direct labour (your workshop floor staff), furnace fuel oil/gas for furnaces, oxy/gas for cutting, transport in, transport out, etc.

A one man show may have overheads of insurance, personal disability insurance, your car, rego, fuel, car maintainance costs, tax liabilities, maybe rent,etc Therefore your overheads should be lower than the big company, however you alone must bear all your overheads yourself whereas the big company can spread its overhead load over many workers, which may result in a lower overall overhead rate.

In Australia anyway there is a big difference in the overhead cost for a business employing 1 or 2 then up to 5 people then up to 14 people then the costs blow out until you reach about 35 employees when the overhead costs even out again. Just has to do with staff and ammeneties and logistical requirements etc required to service these amounts of employees. I dare say these numbers could be different in the US UK and Europe as different countries have different requirements, re licenses, insurance OHS etc.

What you need to do is sit down and calculate/estimate these overheads over the course of a year, then divide them by your amount of billable hours you plan to work over the course of the year (I normally allow acutual billable hours of 6.5 hours a working day by all my blokes including me 5 days a week, to allow for toilet breaks, cleaning up, looking for tools, repairing equipment etc). This figure will give you a starting point for what you need to allow in you pricing to cover overheads.

Hope this helps.

Have fun

Phil

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This gives me much to think about. I am NOT business saavy, and with all I am reading I don't know if I'm more confused now than when I started reading. I know I want to be a one mane show with my own fab shop doing architectual work (Gates, Railings, Window and Door Grates/Covers, etc. I am a welder. A huge shop? Probably not too big. I am assuming anything that is a consumable is overhead? Or would welding rods be construction materials that are tax exempt?

Are there people you can hire to find this information out? I don't want the government shutting me down because I don't understand business before I even get started.

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The small business administration usually offers classes in this all over the USA

Whay have you not *started* with the "free" stuff your taxes are paying for!

http://www.sba.gov/

Very often the difference between profit and loss or even bankruptcy is how much you know about the business side of things---learn it!
One fellow I worked with, his entire year's profit one year was just from taking depreciation on his business assets correctly.

Check your local community college to see if they offer classes in this area too.

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