So now you know all about your gross profit, which represents income you’ve made from sales, less any direct costs to produce those sales. So the rest is yours to spend on spa appointments, the finest clothing, and that new ride you’ve been eyeing up, right? Not so fast, you’ve got monthly expenses to pay regardless of whether or not you made a sale. Let’s talk about your overhead expenses.

Textbook Definition: Overhead refers to the ongoing business expenses not directly attributed to creating a product or service. Overhead can be fixed, variable, or a hybrid of both.

Definition You Need to Know: Overhead is every expense not directly related to selling a product or services (everything that isn't a Cost of Goods Sold). Your overhead expenses, in total, are usually around the same amount each month. Think of expenses like rent, utilities, professional fees, education, advertising, subscriptions. The monthly overhead number is very important for budgeting purposes because you'll have most of those expenses regardless of whether or not you make a sale that month. So you need to make sure you have enough in the bank to cover those expenses.

A key component to knowing whether an overhead expense or any expense for that matter, is a deductible business expense is to analyze whether the expense is deemed ORDINARY and NECESSARY. Per the IRS an ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business.

Where are they on my financials? Overhead expenses show up on the Profit and Loss/Income Statement.