A guide to cutting costs and increasing profit for your business
“You must spend money to make money” is a common saying in the finance world. However, not all business expenditures are created equal. Some overhead is the cost of doing business, but there are many ways to trim budgets without sacrificing growth.
Whether it’s a small business weathering a tough economy or a larger corporation experiencing a downturn in the market, one of the most effective places to cut expenses is reducing overhead. Many small business owners aren’t clear about what contributes to overhead, so it’s helpful to understand the term before outlining a plan to wrangle expenditures and maximize profitability.
What Is Overhead?
Overhead is a business expense that supports but is not directly related to labor or materials for producing a product or service. For instance, if a company produces a food product, the cost of the packaging would not be considered overhead, but the product advertising would be. Some overhead costs are fixed, like a mortgage payment, while others are variable or semivariable, such as utilities.
Here are just a few examples of what could be considered overhead for a business or office:
- Rent or mortgage
- Salary or labor costs
- Office supplies and equipment
- Maintenance and repairs
- Sales and marketing
How to Reduce Overhead Costs
When businesses need to tighten the belt, it may not be feasible to cut costs for the materials or labor that are the lifeblood of the company. But the indirect costs associated with overhead could be one area that’s draining more resources than necessary.
Some amount of overhead for your business is unavoidable. But leveraging technology and creative solutions like the ones below can help business owners think differently about how to reduce overhead costs and stay competitive without cutting necessities.
Review & Prioritize Overhead Costs
It’s difficult to assess which expenditures to cut without a clear idea of what overhead the business is floating month to month. While an accountant or financial advisor may seem like an unnecessary expenditure that will only add to overhead, getting professional help is crucial. Once expenses are clearly detailed, prioritize overhead in different buckets, focusing on costs that aren’t complete necessities.
Reevaluate, Refinance, and Renegotiate
Business owners often assume rent payments, interest rates, and contractual agreements are fixed costs, but that’s not always the case. Evaluate contracts, loans, credit cards, and other associated costs to determine if there is a way to refinance or renegotiate terms or rates. Designate someone to lead the effort with strong negotiating skills and a willingness to push for concessions.
Sell Old or Unnecessary Equipment and Supplies
Most businesses or offices have a storage closet or storeroom with technology relics, office furniture, or unused supplies tucked into dusty corners. There’s no point in continuing to let that equipment take up space when it could be contributing to the bottom line. Clear out old computers or clunky file cabinets and sell them, or donate equipment and supplies to a charity or nonprofit organization. Don’t forget to keep the receipts to get the write-off on next year’s taxes.
Explore Low-Cost Staffing and Space Solutions
Some employers take the most straightforward route to reducing overhead costs by cutting staff, but this solution can also hurt long-term growth and employee morale. Be open to exploring alternatives like telecommuting options or outsourcing some work to contractors to minimize overhead costs for facilities. If business improves, contractors or freelancers can always be offered positions that bring their talent in house.
Plus, telecommuting can provide the opportunity to downsize office space and further reduce overhead. Consider carefully if a remote work model would make sense for all parts of the business and how it might affect other expenses like utilities. For instance, it may make sense for salespeople who meet with customers and clients daily to work in-office. However, support staff in financing could effectively manage their workload in a home office setting.
Some business owners may want to evaluate if renting is a better option for the foreseeable future than carrying a mortgage. If the building has already been purchased, assess the space to decide if the company makes good use of the square footage. There may be parts of the building, factory, or office that could be sublet to another business.
Trim the Marketing Budget
Scaling back on promotion doesn’t mean compromising on marketing. Several creative solutions leverage referrals from customers and clients to market products and services just as effectively as traditional advertising. Offering incentives for referrals or social media reviews and recruiting brand ambassadors are all clever ways to expand your customer base on a shoestring budget.
Consider partnering with another business that offers products or services that complement yours. An example is when a day spa connects with a specialty cosmetics company to provide promotions or co-host events that attract attention and reward referrals.
Get Efficient with Paperless and Reusable Products
Going paperless is the buzzword of the decade, but it’s about more than just electronic communications and documentation. Think of all those paper cups in the staff room or the endless reams of paper towels on standby in the bathroom. While businesses can’t eliminate disposable products completely, reducing consumption is the goal.
Removing paper from the equation means reducing expenses associated with printing like ink, toner, and even filing cabinets. Handling the transition to paperless should be a carefully orchestrated endeavor that ensures all vital records are backed up to a cloud, and redundant documentation is shredded for security purposes.
Track Supplies & Services
Some offices or businesses choose to lock up supplies or carefully track consumption. Another option is to incentivize employees to reduce usage and create a thriftier office environment. This could include efforts to curb energy use through campaigns to turn lights off or switch to LED bulbs throughout the office.
Any monthly or yearly service (phone, internet, communication programs, etc.) should be evaluated regularly to make sure it’s not raising a company’s costs more than its value. Bills associated with phone systems, both in terms of technology and service, can eat up large portions of a company’s budget. Evaluate if the phone system and provider is the right one for the size of the business and make necessary changes to reduce costs.
Find Credit Cards with Benefits
Most business owners have at least one credit card to front immediate costs, but often there isn’t much forethought about which line of credit to choose. Focus on one that’s designed for business owners and provides benefits the business can use, like travel miles or cash-back rewards. Evaluate if it’s time to shift balances to another line of credit to lower interest rates or remove annual fees. If the current balance for your business is spread out over several lines of credit, talk with a financial advisor to determine if consolidating debt is an option.
Cut the Hidden Costs
Hidden costs lurk everywhere, and overhead is no exception. Look for lots of smaller expenditures like client dinners or industry memberships that add up over time. Travel costs are another opportunity to examine unnecessary expenses. Determine if goals accomplished through business travel could be better addressed through an efficient virtual meeting. Finally, better planning and early booking can reduce last-minute price hikes for hotel and airline tickets.
Carefully reviewing overhead costs line by line will not only help keep your expenses from draining profit from your bottom line but also ensure the long-term success and viability of your business.
Written by: Madison Crader, BOSS Contributor
Madison specializes in content related to small business digital marketing and building brand awareness. She has a passion for helping entrepreneurs grow their business and set long-term goals.