In any business, you need money to get things up and running, but it doesn’t determine your success rate. It is how you spend it that matters the most. Reducing operational cost, while enhancing efficiency and productivity will yield higher profit, which in the business world, is the benchmark for success.
A large part of most business-oriented companies expenditure goes towards creating or producing a product or service. These are what is referred to as direct cost. The other expenditures which are not directly linked or associated with the product or service are called overhead cost.
If you are self-employed or a small business owner, you will concur with me that overheads can cost you your business if not properly managed. Direct costs, on the other hand, are a necessary evil – you have to use money, to make more. But for start-up or a business that is going through a financial storm, a month with high overhead could be the straw that broke the camel’s back.
Sadly, most people love overheads. They love nice offices, deep carpets, new buildings, new computers, elegant desks among many other nice things. But all these signs of success, are nothing but a mirage, false dawn – a trap even. It will bind you and make you a prisoner, and before you know it, you’ll be deep in debts.
So, what does it mean to reduce overhead?
To reduce overhead costs means minimizing those expenses that don’t contribute directly to generating products or services. These include expenses such as advertising costs, office supplies, utilities, insurance, and rent. These expenses must be paid regardless of whether a company is making a loss or profit.
To reduce overhead, you will first need to assess to identify those expenses that are not necessary. There are some people who will argue that all business expenses are important and that’s why it has been included in the budget. Well, while that is true, there are still those expenditures that a business can do without, those that are nice to have but are not really necessary. After you’ve identified the overheads from your budget, determine whether they should be eliminated fro the budget or it should be minimized
Removing an expense from a budget is never easy, but for your start-up to succeed, you will need to do away with all the expenses that are not a priority now. This might include things like, huge office space, extra computer, fancy office desks among others.
Should you reduce your overhead cost?
When the business is low and things don’t seem to move, reducing your overhead expenses is the easiest and most effective way of minimizing your losses and putting your business on the right track to profitability. As stated earlier, direct costs such as inventory, the cost of raw material, cost of distribution, and all the other non-overhead costs needed to create revenue are crucial to the business and therefore they are most difficult to scale-down.
How can administrative costs be reduced?
Determining how to minimize administration costs, is crucial for a company to attain its long term goals and achieve maximum profit. By slashing your expenses, you will decrease the money required to break even. It will also improve flexibility, improve cash flow, and ultimately improve profitability. Below are some tips on how you can reduce your administrative cost.
1.Re-evaluate your expenses
Evaluating your expenses enables you to determine where your money goes, as well as, the overhead expenses that need to be removed from the budget. Assessing your expenses can enable you to establish whether you have been getting value for money. For example, you can look at the money allocated for marketing and advertisement and determine whether the money you’ve pumped into this specific activity had any value – has there been an increase in clientele as a result of advertisements? If the answer is yes, then the strategy is working, if it is no then you’ll need to change tact.
2.Monitor your utility expenses
Utilities if not carefully monitored, can cost you quite a bit. So, make sure that your heating and electricity bill doesn’t skyrocket out of your control, by switching off electronics and lights that are not in use, maintaining the air conditioner at a reasonable rate, and keeping the thermostat low.
You should also avoid using telephones and make use of the internet. Instead of calling and incurring phone charges, you can video call using Skype, Zoom, or Google voice at a lower rate.
3. Decide whether to buy or rent
The decision of whether or not to buy a property depends on your scale of operation. Long term leases or ownership increases both your financial exposure and fixed assets. While the monthly rental agreement may cost you a little less in the short term, moving to a more appropriate space might be cheaper in the long run. In this difficult financial time (with COVID-19 and all), limiting your financial expenditure until that time when you’ll be comfortable with investing, would be a wise choice.
4.scale down on travel and entertainment
A good customer relationship is important in any business and a face to face meeting can be highly effective in convincing a client to consider your business. However, it shouldn’t be a function of expensive dinners and lavish gifts in high-end hotels. Create an entertainment policy that reflects the current economic situation.
Technology has made things easier and reduced distance and therefore you don’t necessarily need to have specialists and administrative people to come to the office. They can work from home. Working from home helps to minimize the requirement for office space and other supportive services. In most places, employees who work from home take less salary as they don’t incur a commuting cost.
6.sublease your yard or office
If you have a large office space, you can decide to sublease the unused space. The good thing with subleasing is that you will still be in control of the premise. It also gives you the opportunity to earn some extra income.
7.Automate all possible functions
Automation makes works easier and faster. There are various software, cloud solutions, software as a Service solution (SaaS) available out there for business owners dealing with any type of business. Good automation software will help reduce errors, streamline efficiency, and reduce payroll.
How can direct costs be reduced?
Direct costs as stated earlier are expenditures that are directly associated with the production of a specific product or service. Business owners usually try to minimize these costs by using cheaper material, equipment, and labor. However, the manufacturer has to consider risks that come with such changes. These changes could contribute to the production of poor quality products which can subsequently result in a decrease in sales. Below are some tips on how to reduce direct costs.
Labor: One way to minimize direct costs is through a reduction of employees. While I understand that this is a difficult decision, sometimes it is necessary, especially, when it is a matter of salvaging your business. The first thing you need to do when laying off some of your staff is to assess the number of activities vis a vis the number of employees. Then ask yourself; can you be able to afford to lose them without affecting the quality of your product?
Outsourcing: Another way of saving on labor is by outsourcing some of the production tasks. Although outsourcing will not save you as much money compared to reducing some of your employees, it is still one of the common options among companies
Materials: Materials are some of the things that can escalate your direct cost. To avoid these you can consider using materials that are less expensive as a substitute for the ones that are highly-priced. When choosing the material, choose one that is cheap but of good quality to avoid compromising the quality of your product. For example; businesses that deal with the production and sales of clothing can use the fairly priced polyester or acrylic material in place of cotton wool.
Equipment: Equipment used in generating products or in offering services, can drive up your direct cost. To avoid this, you can lease some of the expensive equipment that you require instead of buying new ones, which is expensive. Additionally, you can also opt to buy second-hand or refurbished equipment that is still in good condition. Remember to look out for refurbished equipment that has a warranty to protect your investment.
Types: When there is a high demand for a product, the prices usually go up which is a good thing for a company or business that is starting up but on the flip side, is that when this happens, multiple direct costs also go up when a seller sells more products or expands his/her business. The direct cost here comprises of the wages of the people handling the production. If the company offers insurance to those employees, it will also be added to the direct cost.
Small businesses can sometimes feel ignored when dealing with big suppliers. As a result, some of the small companies reluctantly accept the terms set by the suppliers. But you don’t need to concern yourself with that, as suppliers are just like you, looking to make sales. Actually, most suppliers prefer dealing with small companies instead of big companies with huge accounts as they end up being dependent on them.
Lastly, reducing your overhead expenses is crucial for the success of any business and requires continuous effort to sustain positive performance. If you are dealing with a supplier who is not willing to assist you cut-cost, don’t despair – there are so many other suppliers who are willing to help. As for the administrative cost, for you to successfully trim them, you will require participation and cooperation of your employees