The overhead costs of every business help them to perform and operate their day-to-day activity. Knowing what you really need in your small business comes with reducing your overhead costs. It maximizes efficiency and minimizes the possible downturns of your business.
One of the independent revenues of a small business is the overhead costs. You are obligated to pay it whether you gained a profit or lost something. It is important to note that your business overhead costs do not include your expenses incurred during the production of services and goods. Take furniture-making as an example, and you are not advised to include the cost of materials like lumber as part of your overhead costs.
Why reducing the overhead cost is important
When your small business is experiencing a downturn, reducing the overhead cost is essential. In every aspect of business operation, controlling and maintaining the overhead cost is the easiest way to make your business profitable and reduce the possible losses. It is important to note that your inventory, raw materials, and other operating expenses are important to keep your business operational and boost your business revenue.
What is the difference between operational costs and overhead costs
The key costs that every small business consider lies in the operational and overhead cost. But what exactly the difference between the two? People often think that these terms are the same and interchangeable. To give you a better understanding of these concepts, here are the points that you need to remember.
Operating Expenses
It is also known as direct costs. These expenses are the necessary expenses that businesses make to continue their business operation. It is essential, especially for everyday business operations. Under this category, the expenses include any processes related to selling, producing, and marketing your business products or services. You can also include labor, equipment, material, manufacturing utilities, packaging, and other related expenses.
Overhead Costs
It is also one of the important expenses that small businesses need to focus on. And these are the costs that specialize in the ongoing costs to maintain the general functions of the business. In simple terms, these are the expenses that you need to pay in order to continue operating your business. It is important to note that even if you gain or lose a profit, paying these overhead expenses is compulsory. Examples of overhead costs are your business rent, software, accounting, insurance, general utilities, and salaries to maintain the management.
What are the different types of overhead costs
Fixed Overhead costs
Small business owners spent time and effort complying with these expenses. These expenses do not change regardless of how much profit you earn, your business activity, and the time spent in the market. The common examples of fixed overhead costs are insurance premiums, rents, loan payments, property taxes, mortgages, and government fees. You need to know that, even if you are not generating revenue or selling a product, these costs remain constant or the same.
Variable Overhead Costs
These are the expenses that change depending on your cash flow, business activity, or sales volume. For example, if your business is booming and your sales are busy, your variable cost also increases. It is directly proportional because if your business activity is stagnant, your variable costs will also become stagnant. Common examples of variable overhead costs are office supplies, shipping, legal costs, utilities, maintenance equipment, business marketing, and similar business transaction expenses.
Semi-variable overhead costs
These are the expenses you are required to pay, but the costs vary on your business activity. It changes slightly given in some circumstances. An example of semi-variable costs is vehicle costs such as gas and repairs. You can also include the price of the utilities that you need for your business operation. Your workers’ hourly wages are also an example of semi-variable expenses: sales-related salaries and commissions.
How to reduce overhead costs
Invest in an accountant. Most businesses are thinking that an accountant is not necessary. One of the best ways to keep track of your expenses and your business operations is hiring a professional to keep an eye on them. The accountant will handle all your finances and inform you of the primary expenses that your business focuses on. It also helps you to cut costs in the long run. Having an accountant will help you improve your business’s financial accuracy and avoid costly mistakes. You can also ask for ways that can increase your assets and accounts. Accountants can also look for possible ways to address tax deductions.
Look for a cost-effective business space
It is undeniable that your office or commercial space plays an important part in your overhead expenses. As a business owner or a potential manager, it would be best to evaluate or reevaluate your office’s location and size. It would be great if the place itself addresses the business’s needs and helps in accomplishing goals. One way you can do this is by switching to a more cost-effective location without sacrificing the company’s productivity or revenue. If it is possible, you can ask your employees if they can work from home. And you can also make some arrangement that maximizes all the office space.
Do not buy a building; renting a property is a good idea
It is important to note that buying a property or equipment for your business or organization is a large-scale investment. If you want to maximize your cash assets, renting or leasing can be a good idea. It allows you to maximize the building or equipment without thinking of the possible maintenance, repairs, and upfront payments.
Downsizing
The salary of your workers is one of the biggest factors under your overhead costs. If you do not want your business to suffer or think that you have more than enough employees, downsizing is a great option. If you have the chance to reduce your workers without damaging the productivity and morale of your employees, you can do downsizing. However, the best way to cut the costs of your employees starts with your hiring decisions. Evaluating your potential employees and making a smart choice on your employees will help you improve your office’s efficiency. You can note their work experiences, their skills, and the attitude towards working. Investing in training is also a good choice. It helps you upgrade your employee’s skills and develop essential knowledge that can help you profit in the future.
Go Green
As a business owner, you are not just gaining more profit. Helping the environment also be part of your priority. But you can also achieve both. It is important to know that your utilities play a huge portion in your overhead expenses, especially if you are not careful. One of the ways to reduce overhead costs is investing in eco-friendly materials like green outlets, LED bulbs, and energy-friendly power strips. It will cost you a lot of money at first, but small businesses will definitely make a profit and lower their utility usage in the process. You could also start doing paperless transactions to save money from using paper, electricity, and printing. You could also maximize the use of the internet. It will help your company cutting costs of unnecessary transactions.
Outsourcing
Business owners do not need to do everything all by themselves. One of the ways to reduce overhead expenses is outsourcing. Make sure that you outsource the responsibilities and tasks that you need to accomplish. It could help you fill in the gap in your company without even paying full-time salaries. You could also save enough money on the cost of overhead expenditure and office supplies. You also have the power to cut back if you do not need the third party services anymore. One of the ways to reduce overhead expenses is to choose the suppliers well. It would be best to find freelancers suited to the tasks, like in marketing and accounting.
Build your product ambassadors
Small businesses need to invest in marketing, especially if they want to rise above the competitive industries. However, this may end up exhausting your savings. But, there is another way to save on advertising costs by maximizing your marketing tool. To avoid spending money and cut costs, you can use the testimony of your loyal customers. You can increase your sales by encouraging your customers to be your brand ambassadors. With this, you do not need to spend money on advertising. Instead, you make money long term. In return, you can offer them discounts, bonuses, and incentives with every referral that they will get. Many people will also be grateful, especially if they really like your brand.
Review your contract from time to time
Evaluate your contract as much as possible if you have been in business for a long time. You can do some negotiation in terms and conditions that you are using. You can use it to save money, and it also helps you value your company’s growth. It would be best to cut the contracts that do not serve essential value to your company.
Bottom Line
Reducing overhead expense is known for its difficulty and complexity, but it is not the case. If you think that you will spend money for nothing, think again. Limiting your expenses will give you cost savings and an alternative line to find better service and appropriate tools. It can also help you improve your business management and find or get a service your business needs. You can save from paying overpriced property taxes, evaluate your office equipment, get the best accounting service deals.
The bottom line is you do not need to make drastic changes in your downsizing or budgeting. All you need to do is to use your resources well. See the bigger picture of your company’s financial position. Take one step at a time, and you will enjoy the fruit of your labor.
