How To Drastically Reduce Business Overhead Costs
As a business, profit is always a concern. While sales are a primary factor in this equation, few things can eat away at your bottom line more than overhead costs.
Reducing business overhead costs can make each sale go farther for your bottom line, and ultimately give your business a stronger cash flow. But, before you start trying to cut overhead costs, it’s important to understand what overhead costs are. Then, we’ll examine how you can reduce business overhead.
What are overhead costs?
When running a business, you have a number of costs to consider: materials cost, wages, licensing, and so on. One of the biggest umbrella costs is overhead.
Business overhead costs are any ongoing costs that accrue while running a business. But, these costs aren’t directly tied to your services or products.
For example, your overhead likely includes: utilities, rent, equipment, insurance, and even wages of administrative employees not involved in making your product or offering your service.
If you’re wondering whether something is an overhead cost, ask yourself if it plays a direct role in the creation of your product or service. If not, it’s likely overhead.
You’ll notice many overhead costs are things you can’t exactly live without. So, how can you go about reducing them?
10 ways to reduce business overhead expenses
Overhead costs are generally tied to essential pieces of your business. But, this doesn’t mean you can’t reduce the amount you’re spending on overhead each month. The following tips can help you reduce your overhead and improve your cash flow.
1. Audit your software
First things first, it’s important you take a step back and evaluate what software your business needs to function. It’s easy for software licenses to renew without realizing it. It’s even easier to forget you even have these pieces of software, as you’ve likely replaced them with something newer and more efficient.
Go through your statements and look at which softwares you’re currently paying for. If you’re unsure about whether or not you need a tool, ask your staff if the tool is used. You can also send out a quick internal survey via email and have your staff tell you which tools they use.
If a certain tool isn’t used by anyone, cut it. If a few people are using a piece of software, see if you can get similar functionality for free or from a cheaper alternative.
2. Reevaluate existing vendor contracts
Much like software, it’s easy to neglect vendor contracts. Go through your vendor contracts and review the terms and costs. Then, do some research and see if you can find similar vendor pricing elsewhere.
If you can find proof that other vendors are offering similar products or services for cheaper, reach out and try to negotiate a better deal. Oftentimes vendors will lower their prices to keep a consistent customer around.
This also speaks to the importance of vendor management. If you’re not practicing vendor management already, be sure to implement a vendor relationship management strategy ASAP.
3. Buy supplies in bulk
There’s a big chance your business uses some kind of supplies, whether it’s in the manufacturing of a product or simply in day-to-day office activity. In either event, look at your previous inventory statements and see what quantity of supplies you need for the next quarter. Then, shop around and try finding a good bulk deal on supplies.
If you’re in the process of reviewing vendor relationships, this is a perfect time to mention increasing the quantity of product you order from a vendor in exchange for a better unit price.
During your supply review, take note of any unnecessary supplies. For example, if you have a bunch of unused printer paper or pens, you can likely halt any future purchases of that item until a need arises.
4. Review existing employees
Nobody likes firing employees, but it’s important you review your existing staff. Go over performance numbers and ask yourself if you have any employees that aren’t necessarily worth keeping on. It’s also possible you have a position that only needs to be fulfilled part-time instead of full-time.
A bad employee can cost you 30% of their first-year wages. While it’s painful to fire someone, a bad hire is going to do more harm than good. If you have underperforming or problematic employees, removing them from your company is both a great way to cut overhead costs and mitigate the damage done to your company.
5. Cut out paper
At Phoenix Energy, we’re all about going green. Going as paperless as possible is a wonderful way to cut your spending while doing good for the environment.
Go through your utilities and vendors and see who offers paperless billing. You’ll still receive digital copies of receipts and bills, preventing any headaches during tax time. But, you’ll have less paper cluttering up your office and eating up valuable space.
You should also offer paperless for your customers, as this can reduce the amount you spend on printer and receipt paper. You can even go paperless with your internal operations, sending emails in place of printed handouts, etc.
6. Review insurance needs
Your insurance needs have likely changed since you started your business. Go through your insurance policies with a business consultant and see which policies are outdated, bloated, or completely unnecessary.
It’s a bad idea to cut all of your insurance, so be sure to read up on how you can safely prune your insurance needs without leaving you, your employees, or your business at risk. For example, you can take yourself off worker’s comp insurance to reduce premiums without adding any risk.
7. Consider a professional accountant
You’re trying to save money, so hiring an accountant might sound like the wrong move. But, an accountant can help you find areas where you can reduce overhead, become more efficient, and improve your cash flow. This is all doubly true as an accountant grows to know your business, as they’ll have more and more ideas on boosting efficiency.
A full-time accountant will also free you up to focus less on finances and instead focus on what matters most: driving your business forward. An accountant can easily handle finances, but only you are capable of marketing and growing your business. While an accountant is an added cost, they’re also an investment that will pay off in the form of more free time for growing your business.
8. Evaluate your physical space
Real estate is often one of the biggest costs businesses face, especially if they’re in a desirable location. Ask yourself if you really need the space you have. Do you have a lot of unused space? Employees that could easily be working remotely? Are you in a space that’s popular and expensive, when you could be somewhere more cost-effective?
There’s a good chance you can cut your space by allowing some of your workforce to go remote. There’s an even better chance you can find a cheaper location. If you’re not operating a storefront at your location, your business location is less important to your success. In that case, you should look for a cheaper area, as this can greatly reduce your business overhead.
9. Go remote
Keeping with the theme of reducing office space, it’s never a bad idea to ask yourself whether or not your staff can be remote. Office space is a huge expense, so it never hurts to see if you can have your employees work from home.
If being fully-remote isn’t possible, you can also look into an alternating remote schedule. This allows you to have half the space, with half your employees working remotely half of the week, coming in on alternating days. This cuts your office space in half and requires only half the desks, which also limits how much you need to spend on computers and even electricity.
10. Go green
A greener office is generally a more efficient office. Audit your entire workspace and go green wherever you can.
- You can start small by replacing your light bulbs with energy-efficient compact fluorescent (CFL) bulbs or LED lights.
- Consider using motion-activated lights in low-traffic areas. This will prevent lights from being left on in rooms with little foot traffic.
- Use Energy Star appliances throughout your workspace. These can reduce your energy use and put a large dent in your energy bill. Best of all, Energy Star appliances are typically the same price as non-compliant appliances.
- Switch to renewable energy. Renewable energy is often cheaper than traditional power, and can even be incentivized in certain states with various credits.
Going green is a great way to save money, save the planet, and build a better brand image for your company. Sharing pictures of your efforts on social media can help others see that your company truly cares about protecting the planet, and even drive more traffic to your business.
To see how renewable energy can help your business, be sure to schedule a free consultation with Phoenix Energy today.
Less overhead, more money, greater success
You can quickly reduce your overhead costs by following the above tips. With less overhead, you’ll have more money, less stress, and a stronger cash flow. All of these elements can tip the scales in your favor and set you up for greater success than ever before.
It’s important to remember that your overhead costs will continue to shift as time goes on. It’s a good idea to repeat the above steps at least once a year, if not more. While auditing your overhead is a fair amount of work, it ultimately frees you up to focus more on your business. And that’s something far more valuable than anything on your overhead sheet.