Business owners are in a constant battle between income and expenditures. The balance between the two can be quite temperamental, too far one way and you’re out of business but in the right direction, you have a healthy profit.
Put simply, businesses have two different types of costs- direct and indirect. Direct payments refer to anything which involves investment into your products and services, so for example the cost of materials, manufacture and labour. Indirect payments or overheads are all of the other costs that can’t be directly attributed to your products and services. Overhead expenses are the day to day running of the business, think utilities, insurance, rent and equipment.
Whilst the majority of overhead costs are necessary in order to keep your company running, they can add up, leading to lower profit margins and less cash flow. Fortunately, there are ways in which you can reduce your overhead spending and have more money to invest into products. Lower overheads not only mean you can increase your profit margins but also that you can price your products competitively, giving you an edge in a busy marketplace.
Calculating Overhead Costs
Businesses will probably have a general idea of their overhead costs but the best way to see the full picture is by making the relevant calculations. The two most common ways in which to do this is to calculate your overheads as a percentage of your sales or labour costs. This involves ascertaining all of your overhead expenditures. You can then use this number to calculate your overhead percentage compared with sales (Monthly Overhead / Monthly Sales X 100) or labour (Monthly Overhead / Monthly Labour Costs X 100).
The figures can offer a clearer picture of the overall health and efficiency of the business. You want the percentages to be as small as possible as this reflects more money being invested straight into products and services and therefore a greater chance of potential profit.
Reducing Costs
So, you’ve calculated your overheads and you want to bring your indirect expenses down, what can you do? Although you can’t get rid of these costs altogether, there are ways in which to reduce them and therefore save money.
Rent vs. Own
Whether it’s a piece of equipment, a room or a building, you will be faced with the decision to either rent or buy. Obviously, owning can provide more stability and could potentially save money in the long-run. However, leasing equipment or renting a building can offer much more flexibility and allow you to grow on your own terms. Why commit to a large payment if you’re unsure of the future of the company?
Staff
The idea of laying off staff can be incredibly difficult for some business owners but sometimes it’s a necessary sacrifice in order to guarantee the success of the company. Look at the data and ascertain which departments or individual staff members are underperforming. If necessary, most departments can realistically take a 25% cut in staff and still function just as well.
Client Expenses
Investing in your clients is paramount but it can be easy to get carried away, leading to a large bill. Whether it’s travel, entertainment or just perks, client expenses can really add up, pushing your overheads higher. Try to tailor these expenses to your budget and don’t lose sight of the power of face-to-face meetings or conversations over the phone. You don’t necessarily need a lot of money in order to let your customers know they are valued.
Marketing
An overhead cost that can become particularly expensive is marketing. Whether you’re paying someone in-house or outsourcing this process, advertising your products and services can eat up your budget. Fortunately, the internet has become a great equaliser in recent years when it comes to marketing. Social media accounts can allow for extremely effective advertising and they’re free to use. You could also utilise your existing customers to spread the word, encouraging this with small incentives such as vouchers or perks. Word of mouth advertising is still just as powerful today as it ever was, even when it’s online.
Negotiate
Some business owners find it difficult to negotiate but it can play a significant role in reducing costs. Whether it’s utility bills, third party services or even one-off equipment or furniture expenses, always try to get the best deal possible. Many vendors are willing to offer a better deal for companies, especially if it’s a long-term contract.
It’s also worth noting that if you aren’t happy with any of your current deals and the vendor refuses to negotiate, don’t be afraid to take your business elsewhere.
Downsize
Downsizing may seem like a drastic approach but it can help to save a significant amount of money in overhead costs. Downsizing doesn’t mean the company is failing, it can just mean you’re streamlining the business and boosting efficiency. Whether it’s reducing your staff, moving to smaller premises or just tailoring the products and services that you offer, every little helps.
Overhead costs are a necessary evil but with some small but effective changes, you can ensure your business remains robust and profitable.
