If you are working so hard to grow your business and you generate high revenue yet at the end of every month, you can barely make ends meet, it might be time to dive deeper to review your business operations. In reviewing your business operations, the best place to start is to review your overhead costs.
Your overhead costs are costs that are required to keep your business running smoothly and efficiently, but which cannot be directly attributed to any business activity, product or service.
Overhead costs are independent of revenue and must be paid whether the business is in a profit or loss position. They do not include expenses arising from the production of goods or services. For example, if your business is making furniture, the cost of lumber is a raw material and so is not included in overhead.
Overhead costs can include fixed monthly or annual costs (such as leases, insurance, or salaries) or expenses that vary from month to month due to the level of business activity (such as sales promotions or repairs).
For example, overhead costs include rent, utilities, administrative, maintenance, sales and marketing, training, record keeping, graphic design etc.
If your overhead costs are not properly planned and put in check, you may be generating high revenue but still running at a deficit. You may also find out that your business is running you as opposed to you running your business. That’s why as an entrepreneur who truly wants to increase your profit margin and build a profitable brand, you must constantly assess your business operations, find ways of reducing your overhead costs and maintain a healthy balance sheet from month-to-month.
Reducing Your Overhead Costs
Reducing your overhead costs and increasing your profit margin will not happen by magic – it requires intentionality. It’s not something that you can do overnight and then raise up your hands to say I’m done. Rather, it is an on-going process that has no end. As your business grows, you will continue to find ways to reduce your overhead costs.
Let’s review some areas of your business that might need a critical assessment to see how you can either reduce or totally eliminate the costs associated with your overhead.
Administrative: Administrative costs include employee salaries, communication gadgets, power bills etc. Most of these are recurring costs that can easily run into hundreds if not thousands or even millions of dollars, if not put in check. As a business owner, the onus remains on you to constant review your brand’s administrative costs and find ways to reduce some services. Classify the things you need to administratively run your brand into essential and non-essential. The essentials are the things you cannot do without.
For example, maybe your business can’t do without a notepad, that should be classified as an essential item. However, because you consider such item as essential, is not enough to not find a way to reduce the cost of purchase. You can find out if there are other vendors who are selling cheaper than your current vendor or perhaps maybe there are other brands that are cheaper (yet possess the same quality) than what you currently use. This same process applies to your non-essential items. If you use some items that are important but not expedient, you can go through a screening process for such items. An example of that would be paper cups. As inexpensive as it might appear, buying paper cups when your business is struggling to declare a profit is not a sound decision. Instead of using paper cups, you can bring your cups from home and save money.
[Read: 7 Things That Hinder Success]
Rent: If you currently rent your business space, you might be paying too much. Negotiate with your landlord for a lesser fee or consider some other parts of town where rent might be cheaper. Another point worthy of note is that instead of renting, you can also transition into a co-working space especially if your team is small. Also, you can assess your business and determine if you can run it from home. Running your business from home can help you put some of your profit in your pocket rather than using it as overhead costs.
Sales and Marketing: This is another big one. Sales and marketing are needed to grow a business profitable. However, if these activities are not constantly reviewed for effectiveness, you might find out that the budget for sales and marketing is eating deep into your revenue. The best approach is to find out which of your marketing and sales channels are producing results and which ones are not. For the ones that are not, you need to cut them off to reduce your overhead costs.
Accounting/Bookkeeping: Another way you can reduce your overhead costs is by embracing automation for your accounting and bookkeeping. Many automation software packages require some type of upfront investment but once you invest, you will reap the benefits. As always, take your time to research your options as it relates to accounting and bookkeeping and not only will you reduce your overhead costs, you will also increase your productivity.
Utilities: Expenses associated with utilities can sometimes seem inconsequential but if care is not taken, they total to an amount that eats deep into your profit. Examples of expenses associated with utilities include electricity, gas, water, sewer, phone etc. There are some services that can either be reduced or totally eliminated. Your water and electricity and even gas bills can be reduced if you are intentional about reducing usage. If you have employees, impress it upon their hearts of the importance of being conservative as it relates to the use of utilities. Always look for ways to reduce use and costs and watch how your overhead costs will reduce.
Other services: Some of these may include business insurance and health insurance. If you’ve not reviewed your insurance plans in a while, it’s time to review your current policy, shop around for quotes from other vendors and start comparing pricing. You may be surprised to find out that you are paying too much money for your business and health insurance. You can either negotiate with your current provider for a price-match or move to another service provider with lower prices and are also dependable.
Maintenance and Repair: Many times, there are things to be maintained or repaired as it relates to your business. For example, you might have a production machine that needs routine maintenance or a heating unit that is broken and needs to be fixed. The vendors you use might be overpricing you and this is directly affecting your overhead costs and ultimately your profits. It is therefore important that you vet your vendors as much as you can and always ask for a second opinion. That you’ve been using a service vendor for a long time does not necessarily mean you are getting the best rate.
Ultimately, reducing your overhead costs will take time. However, this time when used efficiently will lead to a smoother operation in your business, more profit and more cash flow. Implement these strategies for reducing your overhead costs today and watch your business soar!
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