A Practical Guide to Reducing Overhead Costs

By July 31, 2019 Uncategorized
A practical guide to reducing overhead costs

Small Business Trends recently published an article entitled “20 of the Most Profitable Small Businesses.” The article lists the types of businesses that have the ability to be quite profitable including business consulting, catering, tax preparation and bookkeeping, website design, online tutoring etc…. As you can see, the list is filled with a variety of businesses that require all levels of skill sets. The one thing that almost all of the businesses had in common was their low overhead costs.

Overhead costs refer to the expenses that come from the everyday running of the business and are not directly related to making money. These expenses need to be paid no matter what financial situation that the business is in. Common overhead costs are rent or mortgage payments, utility bills, and office supplies. When figuring out your pricing as a business, it is important to factor in your overhead costs to ensure that you will actually make a profit.

Since these costs can add up pretty quickly, they have to be paid no matter what, and they don’t really help you earn any money, it is easy to see why many profitable businesses don’t have very many overhead costs. Even if your business isn’t listed by Small Business Trends as one in a ‘profitable’ category, that doesn’t mean that your business can’t be profitable, and it definitely doesn’t mean that it can’t benefit from some reduced overhead costs.

Read below to learn how to reduce common overhead costs.

Property/Office Space Costs

Office space can be a big overhead cost for many businesses

Office space can be a huge expense for many businesses–whether you rent or own–which is why if your business can get away without an office space, do it! Working from home can reduce this overhead cost and can come with tax deductions. Other businesses such as cleaning services or landscapers may mostly work out of their vehicles.

However, not having an office is not always an answer for everyone. If you feel like your rent or mortgage payments are a serious burden it’s time to make some changes. Find a place in a less expensive area, find a space with smaller square footage, look for a business to office share with, or try to make a new deal with your landlord.

Utility Costs

Reducing utility bills is a great way to reduce overhead costs

Utility bills go hand in hand with an office space. If you have an office you need to heat it, cool it, have running water, and keep the lights on. A problem is that not all of the employees will treat the office like it is their home. While they may be strict about never leaving lights on in unused rooms at their own house, people tend to be a little looser with these things when it is not actually them footing the bills.

First step for saving money on utility bills is to put a plan for saving energy into action and get the whole team on board. Create an office ‘green team,’ post signs reminding employees to turn off lights and to keep the windows closed when the air conditioner is running.

You can also swap out your traditional lights for LEDs, install automatic light switches, and replace all of the faucets and toilets with low flow models.

Lastly, playing around with the thermostat can save you money on utility bills. I don’t mind constantly changing the temperature in order to try and keep everyone happy–that won’t work. But, adjust the thermostat or program it, to change the temperature a few degrees in the evening when no one is in the office can have significant savings. According to the U.S. Department of Energy, “You can save as much as 10% a year on heating and cooling by simply turning your thermostat back 7°-10°F for 8 hours a day from its normal setting.”

Staff Costs

Try outsourcing tasks in order to reduce overhead costs

Paying employee salaries is considered to be an overhead cost. In order to avoid this, try outsourcing certain tasks such as accounting or bookkeeping. You can also hire freelancers for many projects.

If finances are getting tight, be as honest as possible with your employees to see if deals can be made to benefit all parties. For example, I once knew a small business owner who had an employee close to retirement age. Since the owner knew that the employee enjoyed spending time at a vacation house during the winter months, they worked out a deal: the employee could take the entire winter off (unpaid) and still be guaranteed a job and a paycheck when he came back in the summer. This situation may not fit the needs of your business, but keep your eyes open.

Administrative Business Costs

Shop around to find the best prices on office supplies in order to reduce overhead costs

Paper, and ink, and stamps, and computers–oh my! Envelopes and pens and highlighters and coffee grounds and everything else that is taking up space in that back storage closet. $$$$. These costs can be reduced in a variety of ways:

  • Encourage two-sided printing and copying
  • Send documents as email attachments instead of printing and mailing them
  • Switch to a traditional coffee maker in the break room instead of one that uses individual brewing pods
  • Shop around for the best prices on your supplies

Looking for more help getting your business’s finances in order? Contact us at Lumen Advisory and Finance!