Overhead Margin relates to Overhead Costs, which are the costs in your business that do not change directly with a change in your Revenue and/or a change in your Cost of Goods Sold (COGS).

They include such things as:

These Overhead Costs tend to grow over time and may lead to inefficiencies in your business. This is due to activities no longer being relevant to your business but remain as a cost. 12Faces has several tools for helping to remove these “barnacles” that detract from your Operating Profit. Yellow Belt

Accounting Terminology can be different around the world and even between accountants.
If you are not familiar with the term “Operating Costs” go to the article: Accounting Terminology Translator

When to Use

The analysis of your Overhead Margin is useful when you want to:

Data Required

The main terms you will be dealing with here are:

If any of those terms are not familiar to you check alternative phrases in our article: Accounting Terminology Translator

Calculation

The Overhead Margin is one of many ratio analyses that can measure the health trends of your business.
Ratios measure:

Overhead Margin = Overhead Costs / Revenue X 100

An increase in this number means your business efficiency has worsened as overhead growth has exceeded revenue growth.

Example:

Interpreting

From the example above, you can see:

For more on Gross Margin %, go to the article: How Gross Margin Analysis Boosts Profit Explained

What Is a “Good” Overhead Margin

There is no single “good” figure for Overhead Margin. It will vary widely, depending on the nature of your business.

Examples:

Much of the interpretation of “good” Overhead Margin might relate to measuring how it changes over time.
Ideally, we want the Overhead Margin to fall, meaning it is steadily improving over time.
This means that, even if Revenue and Costs of Goods Sold are going up, your Overhead Costs are not increasing as fast. You are becoming more efficient in the use of Overhead Costs.

Acceptable Increases In Overhead Margin

There are circumstances where increases in your Overhead Margin are understandable; and perhaps even necessary.

If your business is in a growth phase, you will likely be committing money to:

In these circumstances:

Goals

1: Your goal is to keep the Overhead Margin at least constant to Revenue and preferably falling as Revenue increases.
This means that you are becoming increasingly efficient at managing your Overhead Costs as your business grows.

2: You can research “normal” Overhead Costs for your industry and use them as a benchmark for your own business.

If you are below benchmark, it might mean you are below the average operating efficiency.

So, although your Overhead Costs are steady, maybe you should be setting your sights higher.  That should lead to better Operating Profit.

Go to the article: Business Benchmarks Resources
or

You can Google Overhead Costs benchmarks.

Future Proofing

If this analysis turns up anything of interest:

Deeper Analysis

Your  Overhead Costs are made up of several contributing costs like:

There are separate 12Faces analyses you can use to measure the contribution impact of each of these different types of Overhead Costs.  

You can subscribe to our more powerful analysis tools like TrendBoard to have these calculated for you.

Or you can calculate them yourself using the information in the article: Critical Business Financials Explained

More Information

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