December is the busiest month for many NZ businesses. The phone does not stop. The team is flat out. Revenue is up 40% on a normal month. And yet, when the dust settles and the accounts are done, December is often no more profitable than August — and sometimes less.

This is the overhead trap. And it catches more NZ business owners than most people realise.

Revenue Is Not Profit

The distinction between revenue and profit seems obvious. But in the day-to-day reality of running a business, revenue is what you feel. It is the invoices going out, the bank account filling up, the sense of momentum. Profit is what you calculate — and often only once a year, when the accountant sends through the annual accounts.

This gap between feeling and calculation is where overhead costs do their quiet damage.

What Are Fixed Costs and Overhead?

Fixed costs are costs that do not change (or change very little) regardless of how much work you do. They exist whether you are flat out or sitting idle.

Common fixed costs in NZ businesses include:

• Rent and premises costs
• Permanent staff salaries (including your own)
• Vehicle lease payments
• Software subscriptions and licences
• Insurance premiums
• Loan repayments
• Depreciation on equipment

Overhead is a broader term that includes fixed costs plus the indirect costs of running the business — management time, administration, marketing, professional fees, and anything else that supports the business but is not directly tied to producing a specific product or delivering a specific job.

Variable costs, by contrast, move with revenue: direct materials, subcontractor costs, and sometimes casual labour.

Why High Revenue Months Can Be Less Profitable

Here is the mechanism. Suppose your business has $60,000 in monthly fixed costs and overhead. In a normal month, you generate $150,000 in revenue with a 40% gross margin — meaning $60,000 in gross profit. After fixed costs, you break even.

In your busiest month, revenue jumps to $210,000. Gross profit at 40% is $84,000. After $60,000 in fixed costs, you make $24,000 net profit. Good.

But here is what often happens in practice: the busy month requires extra staff, overtime, subcontractors at premium rates, rush material orders, and additional vehicle use. The gross margin drops to 32% because the extra work costs more to deliver. Gross profit on $210,000 at 32% is $67,200. After $60,000 in fixed costs, net profit is $7,200 — far less than the busy month felt like it should produce.

The revenue went up 40%. The profit went up almost nothing. And the owner worked twice as hard.

The Overhead Absorption Rate

A useful concept for understanding this is the overhead absorption rate — the amount of overhead cost that needs to be covered by each dollar of gross profit.

If your annual overhead is $720,000 and your annual gross profit is $900,000, your overhead absorption rate is 80%. That means 80 cents of every dollar of gross profit goes to covering overhead before you make any net profit.

A high overhead absorption rate means your business is fragile. A slow month, a lost contract, or a drop in margins can quickly push you into loss. A low absorption rate means the business has leverage — additional revenue flows through to profit efficiently.

Reducing overhead or increasing gross margin (or both) improves this ratio and makes the business more resilient and more valuable.

Common Overhead Problems in NZ Businesses

Premises costs that no longer match the business. A business that took on a large premises during a growth phase and never right-sized when growth slowed. Or a business paying for space that is used for storage rather than revenue-generating activity.

Permanent headcount that should be variable. Employing permanent staff for work that is cyclical or project-based means paying fixed costs during quiet periods. This is sometimes unavoidable, but it is worth examining whether the mix of permanent and casual or contract labour is right.

Software and subscription creep. Businesses accumulate software subscriptions over time. Many are used rarely or not at all. A quarterly audit of subscriptions typically finds 15–25% that can be cancelled without impact.

Vehicle and equipment costs. Owned vehicles and equipment carry depreciation, insurance, registration, and maintenance costs regardless of utilisation. A fleet that made sense at peak capacity may be oversized for current activity.

Management and administration overhead. As businesses grow, management layers and administrative functions accumulate. These are necessary up to a point, but they need to be reviewed periodically against the revenue they support.

How to Analyse Your Overhead

Start by listing every cost that is not directly tied to producing a specific product or delivering a specific job. Group them into categories: premises, people, vehicles, technology, professional fees, finance costs.

For each category, ask:

1. Is this cost necessary at its current level?
2. Does it scale with revenue, or is it fixed regardless of activity?
3. What would happen if we reduced or eliminated it?
4. When was this cost last reviewed or renegotiated?

The goal is not to cut costs indiscriminately — it is to understand which costs are earning their place and which are not.

The Relationship Between Overhead and Business Value

When a buyer assesses your business, they look at normalised EBITDA — earnings before interest, tax, depreciation, and amortisation, adjusted for any non-recurring or owner-specific costs. A business with lean, well-managed overhead has a higher EBITDA for a given revenue level, which directly increases the sale price.

More importantly, a business with well-understood overhead is easier to value and easier to buy. The buyer can see clearly what costs are fixed, what scales with revenue, and what would change under new ownership. This reduces their perceived risk — and risk reduction is what drives higher multiples.

A business where the owner cannot clearly explain the cost structure is a business that buyers will discount heavily, regardless of the revenue.

What to Do Next

If you have never done a structured overhead review, start with your last 12 months of accounts. List every cost line. Categorise it as direct (variable with revenue) or indirect (overhead). Calculate your overhead as a percentage of revenue and as a percentage of gross profit.

Compare this to industry benchmarks for your sector. If your overhead ratio is significantly above benchmark, you have identified a margin improvement opportunity.

If this analysis reveals more complexity than you expected — or if you want a structured, independent review — a Business Profitability Review can do this work systematically and identify the specific changes that will improve your margins and your business value.

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Ridgeline Advisory is a Christchurch-based business advisory firm helping NZ business owners improve profit, reduce costs and plan succession and exit.

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