In the world of business, you indeed need to spend money to make more money. However, when it comes to a point where your company’s expenses outweigh your income, then you are up for a disaster. According to Small Business Facts, one of the top reasons for closure is low sales, followed by owners retiring or selling the business.
It is not good for any company to be in the red. Although you cannot eliminate expenses in your business, there are several ways for you to reduce your overhead expenses, boost profit margins, and avoid deadly cash flow problems. Keeping your business financially stable helps it stay afloat even with economic downturns.
Overhead Costs vs Operating Expenses
A lot of people think that overhead costs and operating expenses are the same, thus interchangeable. However, there are a few distinct features that separate the two terms.
Operating expenses, also known as direct costs, refer to necessary expenses incurred in the day-to-day operation. It includes materials, equipment, labor, packaging, and other expenses related to production, selling, and marketing products or services.
On the other hand, overhead costs have something to do with ongoing expenses for general business functions. This term also relates to business-related expenses, but it covers items that your business still has to pay whether it gains income or not. Included are rent, insurance, salaries, software, and accounting.
8 Ways to Reduce Overhead Costs
For small businesses, lowering overhead costs brings better profit margins and increased bottom-line. Thus, here are eight ways for your small business to reduce overhead costs.
Hire an Accountant
Hiring an accountant may seem like an unnecessary expense on top of your overhead costs. However, having a professional who can handle your finances can significantly reduce business expenses in the long run. Accountants can help you identify potential tax deductions on top of avoiding financial mistakes.
Rent Rather Than Buy
It is a huge investment to buy equipment for your company. Instead of splurging huge amounts of cash for it, consider renting or leasing it. Doing so would take off your mind additional worry and expenses such as upfront payments, repairs, and maintenance.
Land the Perfect Space
Office spaces typically make up a huge part of our overhead costs. What you can do to reduce expenses on rent is to reevaluate your space’s size and location and consider whether it addresses your business needs. You might want to consider finding a smaller space to rent or switching to another location.
Downsize Your Team
Employee wages also take up a huge part of your overall overhead expenses, second to office space. It is always an option for companies to downsize unless it affects productivity or morale. Nonetheless, the savviest way to trim employee costs is to hire workers with varied skills and backgrounds.
Go Green
If you are not careful, utilities can eat up a huge chunk of your office expenses. The easiest way to lower your electric bill is to use LED or CFL bulbs. Hire a local air duct cleaning service provider to ensure the airways in your office are free from dirt and dust to ensure maximum efficiency of your HVAC system.
Outsource Tasks
Not all office duties have to be done in-house. By outsourcing non-core tasks and responsibilities, you help fill staff gaps without putting additional persons on the payroll. Moreover, it means no other overhead costs. Since outsourcing companies and individuals are experts in their fields, you are ensured quality service.
Invest in Brand Ambassadors
Marketing is essential for the success of any business. However, it can be costly. Want to save on advertising? Consider leveraging your loyal customers as they are the most powerful tool in marketing. Encourage your customers to be brand ambassadors of your company. Offer incentives and discounts for referrals.
Review Contracts
As your small business grows, you would need to reevaluate contracts. Doing so helps you save money. Your relationship with your supplier is likely to change over the years. Consider canceling contracts that are no longer necessary, and for those essential, opt to renegotiate for more favorable terms.
The Bottom Line
Realizing your plans to reduce overhead expenses for your small business may seem like a daunting task. But it is essential as even the smallest costs added up can drain your company funds. Nonetheless, reducing overhead costs need not be drastic. Just reevaluate your current financial standing and see where it needs some reduction.