A daily part of running a business is managing expenses. Every company will have costs relating to various aspects of its operations, from raw materials and supplies to staff and rent.
Your main objective should be to minimise costs as much as possible while still enabling productivity and quality output. Doing this effectively will improve your profit margins and cash flow.
Overheads form a dominant part of your costs. They aren’t the costs that your customers pay for, making them harder to track in terms of ‘value’. Reducing them helps to improve profitability without directly affecting the quality of your products and services.
We explain the impact of overheads in more detail and how to minimise them in your operations successfully.
What are overheads?
Overhead costs refer to the ongoing expenses required for your general business function. They are costs you would have to pay even if you didn’t receive any customer revenue.
Examples of overheads include:
- Rent and mortgage payments
- Accountancy or other service fees
- Insurance
- Management and support staff salaries
- General expenses (ranging from electricity to tea bags)
- Software and equipment not directly involved with your primary operations (such as office computers and programmes)
Overheads typically come in three forms, as outlined below:
- Fixed – costs that don’t tend to change, such as rent and insurance payments
- Variable – fluctuating in line with your sales, such as energy bills and office supplies
- Semi-variable – may vary depending on the context, such as salaries and commissions
As with most costs in your business, you will want to minimise your overheads. You might even endeavour to reduce these as a priority over other expenditures as they aren’t directly related to your products and services, or the price customers pay for them.
Our top 10 tips for reducing overheads
Understand what you can and can’t change
While your aim may be to minimise your overheads as much as you can, the fact is that some costs can’t be changed. This relates to your fixed overheads, such as mortgage and rent payments or government taxes.
Expenses like these are a set cost, with little room for negotiation. You need to account for them as such and avoid wasted energy looking for workarounds.
Instead, prioritise the costs you have some control over and use them to lower your overall overhead cost.
Regularly audit your accounts
The first step in improving your overheads is understanding what they are. Regularly checking your accounts will uncover how much you are spending monthly or yearly and on what.
By regularly auditing your accounts, you learn the main areas your overheads are focused on and how this feeds back into your business. This should help you find where you can ‘trim the fat’, eliminating surplus expenses or those that can be minimised.
Similarly, holding frequent reviews of your financial accounts will highlight instances where costs have crept up or fluctuated beyond what you expect. This flags rising costs so you can investigate the cause and nip it in the bud before it mounts up too high.
It may also be worth working with an accountant when undertaking this task to improve accuracy.
Find competitive deals
A simple way to lower your overheads is by ensuring you have the best deal from your suppliers. This applies to most of your general expenses and utilities, including gas, electric, water, internet, office supplies, and other regular resources.
When you take out a contract with a supplier, costs tend to rise in line with inflation and other factors. While it is tempting to stay with the same provider, they may not offer you the most competitive price. Switching your contract is a great way to lower costs – especially as some suppliers will give good deals for joining them.
Spend time comparing deals on the market to find the most competitive one for your needs. Even if you end up staying with the same company, you may be able to negotiate a better price or switch to a cheaper tariff.
Remember to compare your contracts against the other options on the market regularly. Doing so will prevent creeping costs and stop paying more than you need for resources.
Find cost-effective premises
Many overhead costs are related to your premises – including rent, mortgage repayments or utilities.
Examples of cost-effectiveness in your premises include:
- Finding a rent contract that provides the space and amenities you need at the best possible cost
- Avoiding renting premises that are bigger than you need now and for your growth – even if it means decluttering the workspace or allowing staff to work from home
- Sharing amenities with neighbours or sub-letting areas of your premises to other businesses
- Switching to a cheaper location, provided it doesn’t hamper output
- Seeking premises with minimal energy requirement, e.g. better insulated buildings to lower your heating bill
Each of these allows you to minimise overheads, either directly through rent payments or indirectly through utilities.
Go green
There is increased pressure on businesses to be sustainable and minimise their environmental footprint. Improving eco-friendliness has the added benefit of potentially lower costs while doing your part to support climate change.
One way to do this is to utilise renewable energy to power your operations. Renewable power is typically cheaper than fossil fuel options (though there may be a cost associated with getting the infrastructure in place), lowering your energy bill and meeting your green goals.
Another option is to lower your resource consumption in general by using processes and solutions that enable you to complete tasks more efficiently. Examples include speeding up turnaround times (so equipment runs for less time), improving productivity to reduce ‘stand by’ time and finding ways to reuse or recycle unused materials. All of these reduce energy consumption and waste, which minimises excess costs and improves sustainability.
Be sensible
There are also some straightforward ways to reduce overheads, especially when avoiding waste where costs will mount up.
The main culprit is energy consumption. Many of us are guilty of leaving a light on when we’re not in the room or running a tap longer than necessary. However, if this happens regularly across your business, your utility costs will rise.
Aim to instil a sense of responsibility across your workforce, encouraging them to be sensible and thoughtful in their energy use. Actions include turning off electronics or other equipment when not in use and not leaving water running. Use of motion sensor lighting may also assist.
As a business owner, it’s also worth testing electrical devices in your workspace (such as PAT tests) to ensure they are being used safely and in good working order to avoid excessive electricity use.
Staff should similarly endeavour to avoid unnecessary waste – particularly of communal supplies – as this again leads to mounting costs.
Build your team carefully
Another common source of overheads is your staff salaries, especially relating to support or managerial staff. That isn’t to say these employees do not have a purpose – in most cases, they fulfil essential roles that help the company grow and run smoothly.
However, it is still important to build your team carefully, focusing on the roles you need to operate. Everyone in your staff should have a position that enables them to be productive. If you have employees with minimal work to do, it is worth asking whether that role is really needed or if it can be combined with another or even made part-time. This will enable you to get the most from your cost base.
Similarly, when considering expanding your team, carefully choose the roles you need and how many people you realistically hire. You will then recruit precisely the skills you need while ensuring everyone can contribute equally to the business. You may even be able to offer existing staff better salaries that reflect their integrity to the company.
Outsource
When trying to access the skills and resources you need to maximise business performance whilst still minimising overheads, outsourcing can be a good option.
While you will need to pay a fee to the external service provider, this can be substantially cheaper than having to recruit new staff and pay their salaries. It’s also ideal as the partners you work with will be experts in their area and offer you great results in.
The added benefit is that if you do need to scale back, you can end your contract (and choose to pick it back up later), which is much less painful than letting go of a valued member of staff.
Compare renting vs buying
When it comes to premises and equipment, your business has a choice between renting (or leasing for equipment) or buying outright. Both of these will affect your overheads.
It is vital to weigh the pros and cons of buying and renting and determine which is best for you. Renting is more affordable, especially if you are likely to need to change location or equipment or get services included in the cost.
However, buying outright often works out cheaper in the long run and gives you assets to leverage elsewhere.
Spend time considering what works best for you and your business, including what will ultimately result in smaller overheads.
Find a good credit card
Utilising a credit card makes it much easier to track your business expenses.
It is crucial to find a good credit card with low-interest rates and minimal fees associated. It should also suit the various financial needs you have. Finding cards with other rewards or cashback may even be possible to make it a more competitive deal.
Conclusion
Cost management is fundamental for any business that wants to maximise revenue and profit. Managing your overheads is a crucial part of this, enabling you to lower the costs required to run your business but that aren’t directly related to output.
The steps listed above should make the process of minimising overheads easier. Remember, even the slightest change will improve your profitability as part of an ongoing effort to manage expenses and optimise your finances.
If you are still experiencing cash issues, even after reviewing your overheads, it may be worth considering external funding support.
If you are looking to manage costs in your business better or find external funding to fill a financial gap, we can support you. Get in touch to find out how.