In this blog we will look at how to calculate your monthly average overhead and breakeven point as measured in gross profit dollars. There are 2 steps required to calculate your monthly average overhead. Why is that? That is because there are 4 overhead expenses that should not be averaged. These include office/officer/overhead staff payroll, payroll taxes on overhead staff, 401(k)/IRA for overhead staff and health/medical insurance. Step A therefore is to calculate monthly overhead expenses for these 4 items.
The first element in Step A is to identify all your overhead or nonbillable staff and list their weekly compensation. Multiply this number by 4.33, as there are 13 weeks in a quarter. The resultant number is your monthly overhead payroll expense.
The second element in Step A is to calculate payroll taxes on overhead staff. There are 3 types of payroll taxes including FICA, FUTA, and SUI. FICA taxes (Social Security and Medicare) are currently 7.65%. FUTA taxes (federal unemployment tax) are currently 6%. SUI taxes (state unemployment insurance) are different for each state so you will need to research this for your area. Once you have determined that rate, multiply your total overhead staff compensation by the total percentage of payroll taxes to calculate your monthly overhead payroll tax expense.
The third element in Step A is to multiply your total overhead staff compensation by your matching 401(k) or IRA contribution, if applicable. The final element in Step A is to determine your health/medical expense. This can be done by researching last months health insurance bill. Add together the numbers obtained in each of the 4 elements of Step A. This number will be added to the number determined in Step B below.
Step B involves looking at the overhead chart of accounts, referencing the chart we showed in the last blog. First, highlight the 4 areas we showed in Step A above. Then, add the yearly totals of all overhead expenses with the exception of those highlighted and divide by 12. Add this result to the number determined in Step A to obtain your total average monthly overhead.
This average monthly overhead expense represents the firm’s monthly breakeven point as measured in gross profit dollars. It is important to periodically review these expenses to see if things have changed in order to have the correct average monthly overhead. In the next blog, we will show how to use average monthly overhead to calculate your overhead per man day burden.
Courtesy of HVAC Business Dr.