In your lawn care business you’ll have two types of overhead. You’ll have fixed overhead and variable overhead. I have a separate video that explains variable overhead.
Fixed costs make up fixed overhead. An example of fixed cost would be rent, insurance, admin salaries, office expense, depreciation, utilities, and the cost of your estimators.
The characteristic of a fixed cost is, it’s one that doesn’t change very much and it’s not affected by activity. Whether you perform a lot of work this week or you perform very little work this week, your fixed costs, or fixed overhead does not fluctuate. It remains fairly constant and it is fairly easy to predict.
You want to be very slow to add these fixed overhead costs because, if there’s a decline in your business, it’s hard to get rid of these costs. If you go out and you sign a three year lease on an office space, it’s a fixed cost. You know every month your office is going to cost you $1,000 a month. If your business takes a significant decline, it’s very difficult to get out of that three year lease and eliminate that $1,000 a month expense.
Insurance on your office building is an example of a fixed cost because the insurance cannot be eliminated without eliminating the lease. Therefore, that insurance cost doesn’t go away until the lease itself goes away.
Admin salaries are fixed. Yes, you could let those individuals go but, generally to keep your business operating and running, you have to keep your admin team. Therefore your admin salaries are considered to be typically allocated in your fixed overhead numbers.
Watch the video about variable overhead and also watch the video about an elementary way to calculate fixed overhead within your business.