This is an important final step in achieving sustainable business growth. If your business reaches the point whereby the expenses outweigh the income, then your business won’t survive for very long. Keeping a close eye on your business financials to understand the trends, due income, and expenses along with potential variables will go a long way in ensuring financial health. After all, there will be times when you will need to spend money to make money.
Whilst you can’t eliminate expenses from your business completely, there are many benefits when it comes to reducing overheads. When you decrease your overheads, your profits margins should increase, reduce the risks of cash flow problems, and keep your business running through periods of low demand or economic decline.
So, before we look into the types and ways of reducing overheads, it is important to understand the difference between overheads and operating expenses.
- Operating Expenses which are also known as direct costs are the costs that are necessary to keep your business running. These costs are related to producing, selling, and marketing your products or services. So, these costs may include materials, overtime, equipment, and packaging.
- Overheads are also business-related costs. However, these costs are ongoing regardless of sales or production. These costs may include rent, software, insurance, salaries and general utilities.
For small businesses the lower your overhead costs are the better your profit margins are. So, before you start reducing overheads it is important to know the impact of your overheads. To do this you will need to collate all your overheads for a defined period. Then collate your sales for the same period. Put these figures into the below as a calculation:
(Overheads / Monthly Sales) x 100 = Overhead Percentage (%)
As a guideline, if your overhead percentage is lower than 35% you are in a good position. However, there is a balance to this because a profit percentage that is too low could mean you are sacrificing quality which will have long-term impacts.
Now you understand your profit percentage you can look how you can start reducing overheads. Here are 6 simple ways:
- Invest in an accountant whilst an accountant may seem like an unnecessary expense, especially if your business is small, having a professional that truly understands your financials will go a long way. Not only can your accountant improve accuracy of your financial data, but they can also help you avoid making costly mistakes, find more tax efficient ways of working and provide you with their insights into your business performance. Also, your accountant may offer more than “just” support with financials, a standout accountant will team financials with business support services. The right accountant should be considered an investment not a cost.
- Office space particularly now we are coming out of the other side of the covid-19 pandemic, a review of your office requirements is sensible. Could you declutter and find a smaller office? Is there a cheaper location that wont impact revenue/productivity? Do you always need all employees in the office, or can you have a smaller office and a split home/office working policy?
- Does it need to be new? buying equipment such as IT or office desks second hand can have bring huge financial savings. There may be times when buying business equipment has to be purchased new, but do you need to pay for it outright or are there interest free options, or low-cost rental options?
- Think Green utilities can really add up especially if they’re not reviewed frequently. You can start with simple changes in the office like LED light bulbs, a power-down policy at the end of the day and changing to a paperless office. Small changes can have a significant impact.
- Outsourcing do you need to do everything inhouse? Outsourcing gives you flexibility to delegate specific tasks to specialists and free up employees time to focus on more important tasks. You can then dial up or down the level of outsourcing support your needs change. Keep outsourcing to tasks that are well suited to this style of working, such as marketing or accounting support.
- Contract reviews if you have been trading for some time then digging out any business contracts you have is a great way to start reducing overheads. Your business is likely to have changed overtime and the same is probably true of your suppliers and your working relationship. You may have contracts running that are no longer required and others you can renegotiate to ensure you are getting value for money.
Reducing overheads may seem like a challenging task but with some simple tweaks that can be done within a few hours, savings will soon start to add up and boost profit margins. This whole process doesn’t need to be drastic, nor does it need to be seen as budgeting or downsizing, it is amount making informed and smart business decisions that will benefit the business over the long-term.
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