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Overhead Expenses – What Is Your Business Forgetting About?
Every AE consulting business has expenses. We briefly discussed consultant expense types in Overhead, Profit, and Everything In Between: Part 1. In that article we defined four types of expenses: direct labor, indirect labor, payroll burden, and overhead. By partitioning expenses into groups, businesses can monitor and plan their expenses more easily. Those four categories of expenses are also utilized in developing a company’s Overhead Multiplier.
Our focus in this article is overhead expenses. If you take a look at the title of each expense type, you’ll notice overhead expense is the only one that does not deal with expenses directly tied to employees. Expenses with the terms ‘Labor’ or ‘Payroll’ can be tied directly to your company’s employees. Basically, overhead expenses account for any company expense that isn’t tied directly to employees of the company. These include expenses like office rent or loan payments, utility payments, printers and plotters, equipment such as field measuring tools or computers, accounting consultation, legal consultation, cleaning services, etc.
At PAEVEN’s Knowledge is Power webpage you will find an Overhead Expense Calculator that anyone can download for free. This spreadsheet is intended companies just starting out as well as established companies trying to plan for the next fiscal year. The spreadsheet can also help with identifying and tracking overhead expenses. The spreadsheet is simple to use and already lists the most common overhead expenses seen by AE consulting firms. A snapshot of the spreadsheet is shown below:
As stated before, this spreadsheet likely lists most of your AE firm’s common overhead expenses, but it certainly won’t include all of the overhead expenses for your specific company. Every company will be at least slightly different than another, and that is why this spreadsheet is customizable. When you first download the overhead expense calculator you should use it as a starting point. Review all of the expenses listed and determine which need to stay and which ones need to go, because they don’t all apply to your business. You can replace non-applicable expenses with those expenses that aren’t listed and are specific to your company. The spreadsheet also provides instructions on how to insert more rows to the table so you can add more expense types. It will automatically update your overhead expense total at the top-right of the spreadsheet.
When estimating your overhead expenses, it is always best to be as detailed as possible, so ensure your overhead expense spreadsheet captures all of the applicable overhead expenses. If you’re an established firm, the easiest way to do this is to look back at the past year’s overhead expenses and use that information to estimate future expenses. Combining that information with your business plan for the next financial year will yield an accurate estimation of your company’s overhead expenses.
Make sure to leave no rock unturned. Work with your accountant to anticipate all types of overhead expenses. Some expenses like bad debt are easy to forget about. If you’re not familiar with the bad debt expense, then check out Bad Debt. There is always a certain point where getting too detailed just doesn’t yield results that are worth your time. Depending on the total amount of planned overhead expenses, tracking some types of expenses and categorizing them may just not be worth it. If you’re estimating overhead expenses on the order of $70,000, worrying about $100 a year for trash bags isn’t worth the effort. A simplified approach for including miscellaneous expenses is to group several somewhat related items together, such as paper, pens, staples, highlighters, etc. A ‘Miscellaneous’ category can be added to allow you to still account for all of your company’s overhead expenses without all the unnecessary effort.
Accounting for overhead expenses is just one more important step in keeping track of your business’s financial position. Using a simple spreadsheet like the one in PAEVEN’s Toolbox and Templates keeps the process easy and simple, which is how it is supposed to be.
Aaron Mitchell, PE, SE
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