Indirect Costs - what are they?

It's important to know about indirect costs because they can "eat your lunch" in the business world. Such costs are known as operating expenses, indirect expenses, the cost of doing business, and overhead. Essentially, these terms mean the same thing - it's how much in general does it cost for you to "keep the doors open."

There are many issues and concerns surrounding such costs. Here are two important ones: high overhead stalls your business; and, low overhead grows your profits.

In general, let's look at the pain and pleasure of indirect costs. First, let's discuss examples of indirect costs. After we have a handle on them, then let's look at the pain of high overhead costs and the financial pleasure of a business with low overhead.

When we speak of indirect expenses, we're really talking about general company overhead - the cost of running the business. Let's look at some examples of typical indirect costs.

  • rent
  • heat
  • lights
  • water
  • continuing education
  • trade shows
  • conferences
  • office equipment and supplies
  • fuel for equipment
  • maintenance and repair
  • professional services like accounting
  • land line and cell phone
  • connection to the Internet
  • website hosting
  • postage
  • insurance
  • licenses and fees

Most of these examples are easy to recognize as overhead for a company since they are similar to running a household. These direct costs represent infrastructure and resources that we would normally find in our home, so they are the first to come to mind. Here are other costs of doing business that aren't so obvious at first glance:

  • administration
  • support staff
  • unapplied technical staff

In any type of business, other than a "one-zee," you'll likely have a need for administrative staff. This can be a considerable overhead cost, even if it's just part-time help. When you think of it, administrative support typically isn't performing hourly work for your customer, nor is it generally contributing to production, so it's not something that you can invoice as a direct cost of doing business. Therefore, it must be built into your hourly rate or cost of items you sell.

Support staff is similar to administrative burden simply because it's an overhead that generally can't be allocated to a customer job or hourly rate. Think of individuals serving in roles such as a parts specialist, accounts representative, grounds keeper, security officer, housekeeper, or janitor. All of these may be necessary, but they can't be billed directly to your customer for a particular job or product.

Last but not least, technical staff that are unapplied are individuals who are not bringing in money for the company, but costing the company money to keep them on overhead while they do other things in support of the business. These "other" activities might include writing proposals, attending a trade show or conference, or solving a problem for a customer that your company inadvertently created.

Now that we have a better idea about indirect costs, let's look at the pain of having high overhead, and the pleasure of maintaining low overhead costs.

Done with Indirect Costs, take me back to Small Business Finance



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