Overhead
Frais généraux in French
Quick definition
Overhead is the cost of keeping the business running that is not tied to any single sale: admin, rent, software, insurance, professional fees. Every dollar of it must be earned back by sales before the business makes a cent of profit.
The keep-the-lights-on costs
Overhead is what you pay to exist as a business, whether or not anything sells today: rent, administrative wages, accounting and legal fees, insurance, software subscriptions, banking fees, the website. No individual sale caused these costs, yet all sales together must cover them.
Most overhead is also a fixed cost, though not all: an accountant billing by the hour is overhead that varies. The label "overhead" is about what the cost is for (running the business), while fixed versus variable is about how it behaves when volume changes.
Overhead vs cost of goods sold
The costs directly tied to the products you sell, materials and direct labour, belong in cost of goods sold and are subtracted first to give gross margin. Overhead is subtracted after, on the way to net profit margin. Where a cost gets allocated changes the margin math: put too much in overhead and your products look more profitable than they are; the profit the gross margin promises then quietly disappears further down the statement.
Overhead creep
Overhead grows the way clutter does: one reasonable decision at a time. In good years a business adds a software tool here, a nicer office there, a service that saves a bit of hassle. Each item is small and defensible. Years later, the break-even point has drifted upward and nobody decided that on purpose.
The antidote is an annual overhead audit: once a year, list every recurring cost and make each one justify itself. The most clarifying trick is to restate each cost as the sales needed to cover it. A $200 per month subscription is $2,400 a year; at a 30% margin, that takes $8,000 of annual sales to pay for. Ask whether that tool is really worth $8,000 of selling, and the keep-or-cancel decision usually answers itself.
Lean is not starved
One honest caution: cutting overhead that generates revenue, the bookkeeper who keeps you out of trouble, the tool your team actually ships with, the marketing that brings customers in, is false economy. The goal of an overhead audit is to remove what earns nothing, not everything that shows up as a cost.
In Canada
Canadian businesses can generally deduct reasonable overhead against income, and GST/HST paid on most overhead is recoverable as input tax credits for registrants, so the true cost is often the pre-tax amount. Some familiar lines have limits, though: only half of meals and entertainment is typically deductible, and home-office claims must follow CRA's rules on business-use-of-home expenses.
Worked example
Priya's design studio runs an overhead audit and lists 14 recurring costs totalling $3,100 a month. Restated at her 40% margin, that is $93,000 of annual billings just to cover overhead. Three subscriptions nobody has opened in months ($240 a month combined) and an oversized phone plan ($60 a month) get cut: $300 a month, or $9,000 of billings she no longer has to win each year. The bookkeeper stays: those fees keep her taxes clean and her invoices collected.
Related terms
Reviewed by Alexandre Bernier, CFP®, CIM®, PFP®·Updated August 2026