From the "questions we get asked" file...

"What percentage of my income should I be spending on overhead?"

This is sort of a trick question, because the answer depends on several factors, including:

1. How you define "overhead"

Overhead is not a legal term, and the definition varies. According to the US Small Business Association, overhead refers to the indirect cost of running a business - rent, utilities, office supplies, marketing,taxes, administrative expenses - anything not directly associated with a specific product or service.

However, some clinicians include tax-deductible expenses not integral to running an office, such as travel, conference fees, association dues, car maintenance and other costs related to professional activities.

Depending on how many expenses you lump into the category of overhead,the percentage of your income will vary. For illustrative purposes, let's assume you collected $100,000 in patient fees.

If your office-related expenses amount to $30,000, your "overhead" would be 30%.

However, if you also include $15,000 worth of travel and conference expenses, a skills-training course and dues to several professional organizations, that would bring your total expenses to $45,000, such that your "overhead" would be calculated at 45%.

In a group practice, a portion of clinicians' receipts kept by the practice for "overhead" may go toward not only administrative expenses, but also to employee benefits. A portion of it is also for the intangible value of the goodwill the practice has developed with referral partners, as well as more tangible marketing efforts.

2. Fixed vs variable overhead expenses

Costs such as rent and mortgage payments are fixed and predictable. Utilities and office supplies vary somewhat, but generally not enough to make a life-style-changing difference in your annual net income.

However, at some points in your career you will have large expenses. For example, when setting up your first office, you may need to pay for furniture, computers and setup costs. At another point in your career you might decide to purchase neurofeedback equipment, psych testing kits or other professional products. Or you may decide to get specialized training and supervision.

Any of these can run into thousands of dollars, but they are one-shot deals. If calculated into your overhead, they will temporarily increase the percentage relative to your take-home pay.

If overhead expenses fluctuate, what's the point of calculating the percentage?

Defining overhead and calculating overhead percentage can be useful for group practices. It is a logical and fair way to determine how much to pay employees and/or individual contractors. This type of information also helps the clinicians working in the group practice understand the basis for their salaries or percentages of income.

For the solo practitioner, the overhead percentage provides feedback on whether you are on track to earn more, relative to the work you do - thus, collecting more income per unit of service.

Keeping track of your overhead can also help you be more aware of your expenses and the related spending choices you make. If you bring in $100,000/year and reduce your overhead expenses by 2%, you effectively give yourself a $2,000 raise!

In summary…

Business overhead expense as a percentage of income is not a very useful number, unless you consider it in the context of other factors. On the one hand, it is important to contain costs. But on the other hand, it doesn't make sense to avoid or postpone spending money on your professional or business development simply to stay within an arbitrary expense percentage.

For further reading about the financial side of your practice, see Financial Management For Your Mental Health Practice: Key Concepts Made Simple, by Jeff Zimmerman, Ph.D. and Diane Libby, CPA.