Managing Overhead Costs for Small Business

Controlling cash flow is crucial to running a profitable small business. At the most basic way, this means that there is more money coming in than going out. The money that leaves a small business is often eaten up by overheads that are needed for day-to-day operations. Small business performance can be made simpler if these overheads can be reduced.

What is ‘overheads’ in business world? The term ‘overheads’ is used to describe the costs associated with running a business. This can include managing inventory, materials, personnel, office supplies, and facilities. Understanding how to cut overheads costs is important for avoiding unnecessary and unsustainable expenditures. However, it also aids both large and small business owners in their profits and developing a strong and stable company with the agility and endurance to succeed when times are good and persevere when times are rough.

The following are examples of typical overhead costs:

• Admin and H&R – include salary costs on an ongoing basis (wages and benefits); computers, copiers, and other office supplies and equipment
• Maintenance & Utility – include services such as electricity, gas, water, sewer, phone, and internet. If your company depends on vehicles or specialised equipment, maintenance and repair costs will add up quickly. Businesses that offer distribution facilities, landscaping, or equipment rental are examples.
• Rent & Lease – lease costs of the business premises (or mortgage costs if purchased).
• Marketing – all costs associated with selling the product or service, including sales personnel salaries, benefits, and incentive incentives, promotional materials, ads, and trade show costs.
• R&D / Other – expenses are associated directly with the research and development of a company’s goods or services and any intellectual property generated in the process.

When starting a new business, you need to be able to forecast overheads expenses and include them into your business plan. With the help of business planning software like Planium Pro, you can easily plan, forecast and evaluate the upcoming expenses.

If you’re looking for ways to cut costs and raise profits, we’ve put together a list of suggestions below.

1. Reduce Location Costs

A company premises is the most expensive overheads for many small companies. If your small business is failing or you want to drastically reduce your overheads, you should decide whether you still need a business location. Is it possible for you to run your company from the comfort of your own home? Consider if you are having the best value for money in the premises you are currently selling from if your company depends on passing trade and a business premises is inevitable. May you rent a smaller space with more foot traffic for the same amount of money?

With the global economy splitting its opportunities between cyberspace and the real world, now is a good time to rethink your physical office space requirements. Indeed, the new normal has made it both possible and lucrative for businesses to accept remote employees as a way to keep doing business during the coronavirus pandemic and save money by reducing or removing the need for commercial space, as well as the rent, utilities, insurance, and supply costs that come with it.

2. Reduce Software Costs and Review Software Subscriptions

Computers have become an integral part of almost any company, accounting for a significant portion of operating expenses. Examining your current software setup, including the office apps you use, to decide their effect on daily tasks, will help you save money on your machine.

Besides, cloud storage and communications services are frequently free these days, and they can significantly reduce IT costs. Get rid of pricey data storage plans, phone systems, and servers in favour of free and low-cost software services like G suite, Slack, Xero, and G talk. Shop around for the most cost-effective and practical online solutions for your business, but don’t skimp on quality – it’s not worth it.

Although it may not seem to be a huge cost, paper and ink can easily add up, particularly if your company deals with a variety of documents. Look for alternatives to conventional business methods that aren’t paper-based. Besides, going paperless reduces the carbon footprint and consequently saves your business money on the costs of making, storing, using, and protecting paper documents.

3. Reduce Marketing Costs and Revise Your Marketing Strategy

Using current customers as brand ambassadors will help you save money on ads and promotions. Offer discounts or free services in exchange for recommendations or social media feedback to encourage them to support your company.

Request one- or two-sentence testimonials from your customers for use on your website or in newsletters. And in this digital era, word of mouth continues to be an effective marketing tool. Collaborate with businesses that sell similar goods to yours and split advertising costs and activities like trade shows.

Even if you are trying to cut costs, you must be able to set aside some money for marketing in order to develop your company. However, before going forwards with your marketing plan, you can determine each channel and its return on investment. Get a good estimate of how much money you’re spending and how much money you’re making from what marketing channel. Test and calculate various channels, then re-allocate.

For ideas on marketing strategies and costs during the pandemic see: 5 Strategies to Adjust Your Marketing Plan During the Pandemic 

4. Reduce Staff Overheads

Wages are a major overheads for most businesses – typically they account for 70% of overhead costs and pose a significant cost-cutting opportunity. Downsizing your staff is, of course, a viable choice, but you can add value as well as save money by changing your recruiting procedures to insure your team has a varied skill set and the ability to take on new challenges. This will help you cover all of your business’s critical functions without incurring high labour costs or placing your workers under excessive stress. Tasks that don’t need a full-time employee may also be outsourced (or their wages). It pays in the long run to carefully assess labour suppliers (contract workers) and build good, strategic relationships with them, just as it does with any other supplier.

5. Negotiate Terms With Suppliers

With the current difficult economic environment, don’t be afraid to contact your suppliers and vendors and request flexible monthly payment schedules or discounts. They are always able to assist and give small and medium-sized business clients a break.

Final Thoughts

Make sure that each item on your list of business overhead expenses is completely important as you go through it. You must be confident that each cost adds value to your company. If an expense isn’t helping you expand or profit, get rid of it.

These key ways to cut overheads should be considered when beginning a business or when a company is experiencing financial difficulties. It is vital for any business, however, to keep an eye on the balance sheet and make adjustments as required for the good of the company.

Need to plan and forecast your overhead costs? Trial Planium Pro.