

Ask HN: What is Overhead? - robomartin

I do understand what overhead is in a traditional widget businesses.  What would be considered overhead in a company like, say, Zaarly.com or TaskRabbit.com or perhaps an accountant or lawyer?<p>In other words, if the high-level classic definition of "overhead" is that it is anything that does not go into making the widgets you ship --the costs necessary simply to exist as a business-- how does one calculate it for these kinds of companies?<p>On first inspection it would seem that the answer is that nearly everything is overhead for these types of businesses, from salaries to rent, etc.<p>Perhaps past a certain level one can identify server and other variable costs that scale with user count and exclude those costs from the calculation of "overhead".<p>To lend further context to this, my question came out of a question I heard at a recent pitch event.  One of the judges asked:  "How much of the capital you are raising is going to be spent on overhead?".  The presenter didn't really have an answer for that.<p>It made me think about the situation of a pure "virtual" (no physical products made or shipped) 'net-based startup with, say, two or three developers, rent, computers, a few servers and the usual embryonic startup-level infrastructure.  My feeling is that pretty much every dime they spend is overhead: marketing, salaries, servers, everything.<p>The above-referenced presenter should have probably answered "100%".  I am not sure what the judge was actually looking for and how any answer, from "100%" to whatever might have been interpreted.<p>Thoughts?
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dmckeon
Overhead is what would it cost for the business to exist, but to create
nothing and ship nothing.

One approach is to make a table or Venn diagrams using various rules about
overhead, and to stack them up and see which components most frequently appear
in the overhead area. You end up with a spectrum rather than a hard division,
but that's a start.

Costs other than creating shipped products? Costs not variable with
number/amount of products (physical or virtual) shipped?

Another way to look at this is that the question: " _How much of the capital
you are raising is going to be spent on overhead?_ " might be an indirect way
of asking "how much of the capital will NOT go to create value for the
investors?" or "how well have you planned to spend what you hope to raise in
this round?"

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robomartin
> Overhead is what would it cost for the business to exist, but to create
> nothing and ship nothing.

OK, taken to an extreme this means a few hundred dollars a year to simply
exist as an LLC. I know that's not what you meant.

> "how much of the capital will NOT go to create value for the investors?"

In the case of a typical minimal startup one could easily argue that nearly
every dime you spend is going to go towards creating value for investors. In
other words, if you need to rent a small space for three people to work
together than create the software, well, that's creating value for the
investors.

Now, if you decided to spend money buying fancy desks, printing unnecessary
business cards prematurely, installing a large flat-screen TV in the office
and more along those lines clearly there would be a number of line items that
are not directly involved in generating investor value. I guess I am arguing
that this is not the case for the vast majority of startups. In fact, most of
them do (and should) not spend a dime on anything that is not directly related
to what is needed to launch the product.

Not trying to be obtuse. I am actually trying to figure out if there's a
reasonably objective way to define this for a web/software startup. So far
everything I've been able to dig up is nebulous and non-conclusive.

Maybe the "proper" analysis is in phases. On the assumption of responsible
management, during the pre-launch and launch phase every dime spent is spent
to build the software product. Overhead, in this case, might be limited to
rent, utilities, capex (?), marketing and a few other things. Once the site is
launched you could easily argue that a portion of developer cost as well as
infrastructure (server) cost could be allocated at a per-user rate to the cost
of "making" the product. In other words, that would be excluded from overhead.
If you lost users you'd need half the servers, therefore anything past one
minimal server just to have a website falls outside of the definition of
overhead.

Perhaps the judges wanted to learn something akin to your other comment: "how
well have you planned to spend what you hope to raise in this round?" Or,
during pre-launch and initial launch, are you going to spend any money on
anything outside creating direct value for users and investors alike.

I am somewhat surprised that such a simple question can have so many
tentacles.

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Maven911
In management accounting theory there are 3 main categories of expenses:

1) Direct Materials 2) Direct Labour And 3) Overhead - basically what doesn't
fit in materials and labour that is not tied directly to the company's product
or services.

Examples of overhead include:

electricity, property taxes, advertising, accounting, janitors, cleaning
supplies, distribution costs, legal fees, interest on money loaned, human
resources department

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earless1
I don't think developer time is considered overhead for a software outfit. I
believe overhead is anything that does not directly contribute to the bottom
line. At a software company a dev contributes to the bottom line in the form
of shipping code.

