Ask HN: What is Overhead? | Hacker News Reader

Ask HN: What is Overhead?

2 pointsrobomartin4 comments

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?

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?

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.

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".

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.

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.

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.

Thoughts?

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?"

> 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.

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

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.

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