How-to Budget Overhead Expenses
How-to Budget Overhead Expenses
After building a sales and revenue model for the new fiscal year, I begin by looking next at a company’s overhead expenses to budget.
With fixed costs, we dive in to examine the expense lines that are present year-over-year in relative consistency. Some expenses are static: rent, telephone, internet, and so on. Some are just known like service agreements you’ve entered into that have known payment scheduled. Finally, some are predictably repeatable like office postage, supplies, SAAS programs, legal, accounting, and any other line in your Income Statement that is steady.
Just as we did when we Budgeted our Future Sales, we will pull our expenses for the previous year and this year-to-last month for comparison. For this example, we will look at Rent, Office Supplies, and SAAS and Computer Related. I’ve chosen these line items to illustrate the 3 main spending patterns of overhead expenses.
A static spending pattern means you have a contracted amount that you have agreed to spend over a set time period: Rent/Mortgage. You know exactly how much you owe every month. You also know exactly when your annual increases will be if any to drop into your budget. For rental agreements, if you’re at the end of your lease, budget for a 1-5% increase at renewal based on how the last negotiation when with your landlord went and a reasonable outcome when you negotiate your renewal.
Annual Estimated Expenses
To budget for an expense line like Office Supplies you know that you need to buy things for the office: cleaning supplies, files, printer toner, etc… they don’t happen at the same time every year; however, year-over-year it’s relatively consistent. When budgeting these types of expenses, I look at what happened in the last few years, and if this year is staying the same, going up or going down. I set an annual amount consistent with that trend. Then divide that annual amount by 12.
Monthly Allowance + Annual Renewals Expenses
To create a budget for your SAAS (Software-as-a-Service) and Computer Related Expenses you have to look at a blend of your monthly subscriptions, annual renewals, and one time purchases.
How many programs do you pay to access? Make a running list of all of these and how they charge estimate your monthly and annual commitments. How often does your company need to buy new keyboards, power cables, printers? Factor this annual average will create your monthly allowance, similar to office supplies.
These 3 types of overhead expenses will look like this when properly mapped out:
These fixed costs will more likely than not stay the same in next year’s budget except in the most extreme of circumstances. As your business scales, these fixed expenses will adapt to your new business size: it is critical that you monitor these lines closely to ensure that they do not become over-bloated. Since there is little to no wiggle room in these expense lines, this section of your budget will remain the same in all 3 scenarios we discussed in How to Budget Future Sales.
Keep an eye out for next week’s post: How-to Budget Cost Of Good Sold.
About the author: Jeanine Hall is the founder of Quant Solutions. As an entrepreneur herself, Jeanine is an active supporter of the startup/entrepreneur ecosystem and enjoys helping others manage and grow their business.
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