Overhead Costs: 4+ Clever Strategies for Reducing Them
Editors note, we generally don’t cover small business topics here on Clever Dude, but we’ve had significant demand for this kind of article so we’re running it here.
Whether you’re a first-time small business owner or are already a successful entrepreneur with several income streams, you’re probably familiar with overhead costs (i.e. the bane of small business owners the world over). Overhead costs are all the associated costs involved with operating your business (just not the ones that are directly responsible for your business’s operation).
Things like rent, utilities, accounting services, insurance, permit costs, equipment, etc. are all examples of overhead expenses. Nearly every single business will have some level of overhead, and one of the keys to being profitable is knowing how to minimize it. There are numerous strategies that can be used to lower overhead costs, the most beneficial of which we cover in the following sections.
Use the tips and tricks posted below to increase your business’s profitability, lower your overhead costs, and start operating like the savvy businessman (or woman) you are. Before we get to the strategies, we first need to delve into exactly how to determine what your overhead costs are (so that you can understand how to lower them).
Determining Overhead Costs
If you’re reading this article, chances are that you probably have at least a basic understanding of how to determine your business’s overhead costs. However, many business owners simply don’t understand the nuance involved in this calculation or don’t have the time to sit down and actually determine what their overhead is.
Generally speaking, one of your main objectives as an operator should be minimizing overhead costs whenever possible. Having a low overhead means that you can price your products/services at a more advantageous price (thereby attracting more customers/clients). Likewise, having a low overhead naturally means that you might be able to have larger profit margins.
In order to determine an accurate overhead number, you’re going to need to carefully review every single one of your business’s expenses. Remember, not all expenses can be considered overhead costs (e.g. anything involved in the production of your service/products typically isn’t considered overhead).
After you’ve created a list of all your indirect business expenses (i.e. overhead costs), you’re going to need to take that total number and then divide it by your monthly revenue/sales. The number that results from that equation will be what’s known as your business’s “overhead cost to sales.”
Minimizing Overhead: 4+ Strategies for Optimized Operations
Without a doubt, one of the absolute best ways to lower your overhead is by getting rid of your office’s paper. Not the printing paper. No, we’re talking about checks, administration paperwork, general office supplies, etc. The world has gone digital, and your business should follow suit (because the trend doesn’t show any sign of slowing down).
Buying checks and office supplies online are one of the easiest (and most effective) ways to lower your business’s overhead costs. Luckily, there are countless providers of high-quality digital-based office supplies and related materials. For example, simply purchasing checks online can have a significant impact on your business’s monthly costs (especially if you write a lot of checks).
The second thing that should be done is a complete overhaul of your business’s purchasing strategy. Many offices like to segment this responsibility across numerous departments/people, which can often lead to overinflated monthly invoices. Consolidating this responsibility to one department/person (who’s naturally good with money) is an excellent way to lower your overhead costs.
In regards to sales and marketing costs, this is an area that many businesses see as vital to their overall operation (and more importantly, growth). However, it’s also an area that’s possible to optimize for lower overhead costs. Looking into alternative marketing options (e.g. digital versus traditional media), and consolidating your marketing operations to one third-party (or department) can effectively lower your monthly overhead.
Another overlooked way to minimize overhead costs is that of contemplating your business’s current office space. There are many creative ways to cut these costs; subleasing space, renting offices, renegotiating lease agreements, or looking into virtual offices etc. The same can also be done for utility bills as well. The important thing is having someone who’s shrewd enough to make these deals.
Lower Your Overhead by Getting Creative
Thinking outside the box applies to so many areas in life, so you shouldn’t be surprised that it also applies to lowering overhead costs. Creative restructuring of contracts, going digital, renting out unused space, etc. are all ways to lower your business’s overhead (and increase its profitability).
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Image source: Mark Taylor, via Flickr.