6 Effective Ways to Cut Overhead for Small Business
One of the fastest ways to decrease small business expenses is to cut overhead costs. It takes less time to optimize everyday overhead expenses than to address labor, supply and inventory issues. By definition, overhead costs are business expenses that support operations but don’t directly generate revenue. Business overhead refers to fixed costs such as utilities, interest payments, and office leases or mortgages. These expenses must be paid, regardless of a company’s sales revenue or incoming cash flow.
Overhead Costs Affect Profitability
Although overhead costs don’t generate revenue, they absolutely affect profitability. Businesses use a percentage of their sales each month to pay their overhead costs. Overhead costs aren’t based on what you make, and overly high overhead expenses will eat into profits and threaten the viability of your small business. To maintain a thriving business, companies should shoot for an overhead rate of less than 35%. Here’s how to calculate your Overhead Rate:
Overhead Rate = (Total Overhead Costs per month / Monthly Sales) x 100
Lowering Small Business Expenses
In previous articles, we offered several recommendations for decreasing overhead expenses:
- Cut printing, postage, and paper costs by operating a paperless office
- Earn money by selling equipment, instead of storing equipment you no longer use
- Reduce recurring fees by cancelling unused subscription services
- Employ the optimal number of employees by calculating your business’ wage cap
Once you have mastered these cost-cutting measures, consider the next set of recommendations to save money as a small business.
1. Offer Employees Incentives for Cost-Saving Ideas
Small business owners don’t have all the answers. Employees are the ones in the trenches day after day, so they should be able to suggest ways to improve efficiency, thereby reducing costs. Consider offering incentives for their ideas.
2. Refinance for Lower Interest Rates
Take time to review the interest rates and annual fees on your business credit card. Plus, review your commercial loans that you hold for equipment or real estate. Consider refinancing your debt at a lower interest rate. In addition, look for credit cards that offer low interest, cash-back rewards, travel miles, or other perks. Sift through your expense list to identify any items that can be paid with a business credit card, so you earn more rewards.
3. Save on Utility Costs
The costs of gas, water, electricity, and the internet can add up quickly. So, look for ways to reduce these costs, for example, by switching to energy-efficient LED bulbs, low-flush toilets, and motion-activated sensors for lighting.
4. Transition to a Remote Office
In today’s digital age, remote work is easier than ever. Although not all roles are suitable for telecommuting, many technology, managerial, sales, and clerical jobs can be done effectively from home. A virtual business saves an employer on utilities, commercial insurance, lease or mortgage payments, and other expenses related to a brick-and-mortar facility. New employees may even accept lower salaries for the opportunity to work from home and reduce the time and costs associated with commuting.
5. Reduce Communication Expenses
Communications technology has evolved to where many businesses no longer need a landline. If your business requires a landline, consider voice over internet protocol, which uses a broadband internet connection instead of a phone line. Also consider Google Voice, which allows you to call, text, and receive voicemails from your web browser and mobile devices at no cost in the U.S.
6. Limit Travel Expenses
Although travel is oftentimes necessary for business growth, it’s expensive. So, before you take your next trip, consider whether a virtual meeting will suffice. When you do travel for business, stick to a budget. Small business owners can save by participating in loyalty programs to earn discounts for travel in the future. Always book with the same airline and stay at the same hotel chain – one designed for business travelers, not a luxury hotel. Dine where the locals eat, and you’ll experience the local culture and avoid overpriced restaurants. For more business travel savings ideas, read Everything You Need to Know About Travel Expenses.
Work with a Professional Bookkeeper
Reducing your overhead expenses is a fundamental way that a small business owner can improve profitability. For other profitability tips and strategies, contact Prosperity Bookkeeping. Prosperity Bookkeeping helps clients put their money to work for them. We assure the accuracy of business finances, so small business owners can make business decisions with confidence. Schedule a consultation today.
About the Author: Once a mild-mannered reporter and editor, Joan Koehne took on the persona of her alter ego, Wonder Writer, to launch Writer to the Rescue, the content writing division of Packerland Websites. Wonder Writer is “saving the world one word at a time” with power-packed content marketing for digital and traditional media outlets.