Steps to Cut Overhead as a Small Business
Running a business can be expensive: from rent to business cards to mileage, costs quickly add up. It can be useful for small businesses, in particular, to know where you can effectively reduce overhead costs without compromising efficiency or quality.
Overhead vs Operating Costs
There are two main kinds of spending associated with running a business: operating costs and overhead costs. Understanding the difference between them is a great place to start when you are looking to reduce business expenditures.
What Are Operating Costs?
Operating costs are ongoing expenses related to the actual manufacture and sale of your product on a day-to-day basis.
Common operating costs might include:
- Special Equipment
Operating costs are generally considered essential to the business. While you can look for ways to reduce the cost of operation, you run certain risks. For example, you could reduce payroll expenses by eliminating certain employee positions. But this cut back in personnel could ultimately impact efficiency and productivity.
You could also attempt to save costs by switching to a different vendor for certain ingredients. However, you may lose established customers who like your product exactly the way it is.
What Are Overhead Costs?
Overhead costs are those related to the actual running of the business outside of labor, materials, and production.
Many overhead costs are considered “fixed” expenses, since they will continue regardless of whether or not the business is turning a profit. Certain expenses, such as utilities, will vary depending on the scale of the business.
Common overhead costs might include:
- Utilities (electricity, internet, water, gas, etc.)
- Merchant services
- Administrative salaries (accounting, management staff, etc.)
Unlike operational costs which are more difficult to minimize, overhead costs should be reviewed regularly to see where cutbacks might be made. Switching to a better contractor with lower rates is almost guaranteed to have a positive effect on your profits.
How To Determine Overhead Percentage
Calculating your overhead percentage will help you decide if and when you need to find ways to reduce costs. While the exact percentage of revenue you are spending on overhead costs will vary depending on your personal business, most experts recommend you do not exceed 35%. To determine your overhead percentage, divide your monthly overhead costs by your monthly sales. Then, multiply by 100 to obtain the percentage.
(Monthly Overhead/Monthly Sales) x 100 = Overhead Percentage
In general, the lower your overhead percentage, the better. If it seems ridiculously low, however, you may be compromising too much. If you find your percentage is too high and digging into your profits, consider the following easy ways to reduce your overhead:
1. Downsize/Eliminate Office Space
One of the biggest overhead costs associated with running a business is rent. These days, many of us are still working entirely from home or utilizing a hybrid model. Ask yourself:
Do I even need an office?
Remote work has been shown to be just as effective as in-office work, if not more so. During COVID lockdowns, employees reported greater morale and productivity levels. This may or may not be related to the ability to work in comfortable clothing and avoid being in traffic for three hours every day.
If I do need an office, does it need to be this big and/or fancy?
How much space do you really need for the office to be efficient? Do you need an office with a private bathroom or a ritzy view of the city? Do enough people visit to warrant a waiting area?
Does my office have to be in this part of town
In Denver, rent can vary wildly depending on the district. Consider moving your office to an area where rents are not as high.
2. Hire an Accountant
While it may seem counterintuitive to hire another employee when you are looking to cut costs, an accountant is a worthwhile investment. A good CPA will help you avoid mistakes and will be knowledgeable about tax breaks and deductions that could save you thousands of dollars.
3. Review Merchant Services
These days, nearly every business requires a way to accept credit card payments. The ability to process credit and debit transactions is known as “merchant services.” Electronic payments are facilitated via a merchant account, which is essentially a bank account that allows businesses to accept credit and debit payments.
However, not all merchant services companies are created equal. Rates can vary significantly from merchant to merchant (by more than 2 percentage points!). Furthermore, many companies charge questionable fees that go unnoticed by clients. These fees can add up to thousands of dollars over time!
Like an accountant, hiring a good merchant services broker is a wise investment. He or she can help you find a company with fair rates and eliminate unnecessary fees.
Outsourcing can be a great way to scale back on costs by filling employee gaps without committing to full-time pay. It is particularly useful when you only need freelance work, such as digital marketing or graphic design. In the event you no longer need their services, you can simply pause or cancel your contract.
5. Save Energy
Implementing energy-saving appliances, light bulbs, outlets, and windows can be another great investment that will cut costs for utilities long-term and give a friendly nod to the environment. You can also encourage customers and employees to go paperless, ultimately saving a lot on ink, paper, postage, and printing/copying equipment.
Locating a Merchant Services Broker
Next time you review overhead costs, be sure to review your merchant services provider. This is a common expense that is often bloated with unnecessary processing fees. Brendon Degner has years of experience helping clients find quality merchant services at fair prices. Contact Summit Payments today to schedule your consultation.