The day-to-day small to midsize enterprise (SME) business running of expenses is also termed as business overhead costs. When an SME is in a downturn, cost-cutting in such expenses helps a lot.
However, overhead expenses are not expenses that depend on revenue but need to be paid in both positions, i.e., profit and loss position. Overhead costs do not comprise of expenses of production of goods and services. If your business, for example, is making furniture, the raw material cost, i.e., lumber cost in overhead is exclusive.
Overhead costs include fixed costs like insurance, leases, or salaries, which are monthly or annually. Besides that, it includes expenses that vary monthly because it depends on the business activity level, like repairs or sales promotions.
Is it essential to reduce overhead costs?
When business is not making a profit, cutting costs has generally become one of the easiest ways for reducing losses and returning the business to profitability. Inventory, raw materials, and other non-overhead costs that are used for creating revenue are essential in running a business and generally, these are difficult to cut down.
Following are some typical overhead costs:
- Rent: The lease business premises costs or mortgage costs in the case you have purchased land, is inevitable. It is possible to reduce the cost if you negotiate with the landlord properly. In this way, you can move the business to less costly premises. Or even if it is possible, then it is better to convert your business into a home-based business.
- Utilities: Business utilities include water, electricity, sewer, gas, phone and internet service. A couple of ways help in reducing the utility overhead costs and adopt eco-friendly processes. It is possible to review a few overhead costs like long-distance, mobile phone, and internet usage on an annual basis, for the determination of the service level required. Potentially, cost-saving is possible when one is switching to lower-cost plans.
- Insurance: Insurance coverage is an essential need of every business, and it may include:
- Property insurance includes the business equipment along with premises.
- Insurance of general liability can protect a business from its liability arising due to failures.
- Professional liability insurance can help in protecting the business from liability that occurs due to malpractice when a business has a professional nature.
- Business interruption insurance protects a business in case of its unpredictable closure.
Also Read: Pros And Cons Of MSME Loans In India
When you look at the finances of your business and realize that overhead costs are contributing to the revenue as a significant chunk, it indicates that the time has come to reevaluate the business expense. Some suggestions are really effective to reduce some of the most common overhead costs:
- Analyze everything completely: The first and foremost thing to do is to pull all overhead costs; you can easily figure out which costs need reconsideration. However, such costs change with time, but it changes based on the company’s activity level. It would be best if you did a monthly review of overhead costs to ensure there is no drastic fluctuation. Besides that, go through the business expense list each month and mark down the items, including:
-No longer necessary
-Open to efficiencies
-Too high in price
It is better to handle the costs before trying to make profound changes. You may consider the cost-cutting option on a few things and see how they impact the overhead costs.
- A single solution will not work: Only a single solution will not work on your business overhead high percentage as cutting one expense cannot fix the financial problem quickly. Being patient throughout the process will let you know that the most significant business cost savings can happen from a series of small cost cuttings.
- Reevaluation of the third-party contracts: While renting equipment or paying a fee of a service retainer, it is easy to save cost by evaluating current deals to verify if they still are as per your business needs. It is crucial in case the contracts are older. There are chances that the business has changed since it was first established by contract. It is then advisable to look into the contract again.
- Clear out the storeroom: There might be chances that the storage room is occupied with outdated or non-working technology, which includes older computers, fax machines, printers, and phones. Review the technology expenses and throw those things that are no longer required. You may even make a comparison of service providers in the local area to find if services are available at a better rate.
Each of the suggestions mentioned above for reducing overhead costs mainly focuses on an alternate cutting cost decision, which helps in saving the money. By adopting an overhead cost-friendly mindset, it becomes easy to reduce the day-to-day business costs. Some of these smart decisions, later on, become second nature and ultimately transfer your mind to take such kind of business decisions. Indifi is a technology platform that ensures the success of small businesses by providing them with financial support and the know-how to run a profitable business.