Overhead is one of the most discussed areas of the P&L once a business begins to grow.

It is also one of the most debated.

Leaders often ask questions like:

• How much overhead is too much?
• Should overhead be allocated to projects or products?
• How do we understand the real profitability of the work we do?

Departmental or Divisional Managers often ask questions like:

• What is actually in this number?
• How can I control it?
• What decisions influence it?

Understanding overhead helps leadership teams see how efficiently the business is operating and how prepared it is for growth.

Overhead represents the costs required to run the business, not the direct costs required to deliver the product or service.

These costs typically appear within SG&A (Selling, General & Administrative expenses) on the P&L.

Examples of overhead include:

• Leadership and management salaries
• Finance and accounting
• HR and legal
• Office rent and utilities
• Software and systems
• Administrative support

A simple way to think about it is:

If COGS is the cost of doing the work,
overhead is the cost of running the company.

Overhead becomes increasingly important as companies grow.

Early-stage businesses often operate with very little structure. As the organization expands, overhead increases to support:

• leadership structure
• internal processes
• financial management
• systems and infrastructure

The goal is not to eliminate overhead.

The goal is to ensure overhead grows intentionally and efficiently alongside the business.

Healthy companies typically see revenue grow faster than overhead over time, improving operating margins.

Many businesses allocate overhead to better understand the profitability of their work.

This is common in industries such as:

• construction
• manufacturing
• engineering firms
• professional services
• project-based businesses

Organizations often allocate overhead using drivers such as:

• labor hours
• labor cost
• machine hours
• project revenue

These allocations help leadership evaluate the true economics of projects, products, or divisions.

They can help answer questions such as:

• Are certain projects actually profitable?
• Are we pricing work correctly?
• Are some divisions carrying more overhead than others?

Overhead can be handled differently depending on whether you are looking at financial reporting or management reporting.

Both perspectives are valuable and serve different purposes.

From a financial reporting perspective, overhead is typically reported within SG&A on the company’s P&L.

The goal is clarity and consistency in how the business reports its overall financial performance.

However, most companies should also produce divisional or departmental P&Ls to help leadership understand how different parts of the business are performing.

In these cases, portions of overhead may be allocated to departments or divisions so leaders can evaluate the financial performance of each area of the company.

These allocations might include costs such as:

• leadership and management
• finance and accounting
• HR and administrative support
• shared systems and infrastructure

Allocating overhead in divisional reporting helps answer questions like:

• Which departments are operating efficiently?
• How much support cost is required to run each division?
• How does each part of the business contribute to overall profitability?

The key is ensuring that allocations are consistent and transparent, so leaders understand what costs are being attributed to each part of the organization.

Management reporting often takes a different approach.

Leadership teams may allocate portions of overhead to projects, products, or divisions to better understand operational performance.

These allocations help leadership evaluate:

• project profitability
• pricing decisions
• divisional performance
• operational efficiency

These allocations are often used internally for analysis and decision-making, even if they do not appear directly on the formal financial statements.

Overhead allocations can be a powerful tool for understanding the economics of the business. Leadership teams and departmental managers should understand how those numbers are built.

Otherwise, the allocation simply becomes another number on the P&L that no one truly uses.

Some useful questions include:

• Did we allocate all overhead, or only part of it?
• Are certain projects or divisions carrying more overhead than others?
• How was the allocation methodology determined?
• Does the allocation reflect how resources are actually used?
• Are we using allocations for financial reporting or internal analysis?

For departmental leaders, allocations can either become:

• a number they understand and manage, or
• a number they see but cannot influence

The difference comes down to transparency and clarity in how allocations are designed.

When leaders understand what drives the number, they can begin asking better questions about pricing, efficiency, and profitability.

When they do not, overhead simply becomes a number they ignore.

When reviewing overhead, a CFO is not simply looking at the total amount.

They are evaluating how overhead behaves as the company grows.

Questions often include:

• Is overhead scaling appropriately with revenue?
• Are systems and leadership supporting growth?
• Are we building infrastructure that enables scale?
• Are certain functions carrying disproportionate costs?

These insights help leadership determine whether overhead is supporting growth or slowing it down.

Overhead often gets a negative reputation, but in reality it represents the infrastructure of the business.

Leadership teams, systems, financial management, and operational support all live here.

The goal is not to eliminate overhead.

The goal is to ensure overhead is intentional, structured, and aligned with the scale of the business.

When managed well, overhead becomes the foundation that allows companies to grow with clarity and control.

We help growing companies install the structure, systems, and leadership needed to support the next stage of growth.