It includes all those bills you pay monthly, office supplies and labor costs. You would also include any regular amount of time and money you devote each month to marketing your business. Overhead may include loan payments, insurance payments and other regular expenses. Overhead is the minimum amount of cash you need to survive on a monthly or weekly basis. Ultimately, if you're only meeting your expenses you're not succeeding as a business.
Profit is the measure financial success.
Your shop rate is your hourly overhead plus a percentage for profit. It's useful for quoting your minimum rate when people ask you to do small jobs. It also helps when you are pricing product lines or things you are making in quantity. And if you get really busy and the market justifies it, you can raise your shop rate, increasing your profits. Shop rate is important because many inexperienced woodworkers undercharge because they don't understand the relationship between overhead and profit.