When people ask how your business is doing, your first response is probably not about your overhead expense report. Let’s face it: overhead is boring. Not managing overhead costs for small businesses, however, can cause issues with cash flow. When you reduce overhead, the money you save goes toward growing your business.
What are overhead costs for small businesses?
Overhead costs are operating expenses that are not directly related to making a profit. Overhead costs do not go into your products or services (like raw materials) or contribute to revenue, but they are still essential to running your business. Examples of small business overhead costs include rent or mortgage; utilities; taxes; insurance and permits; office supplies and tools; depreciation on equipment and buildings; or legal and consulting fees.
The average overhead costs for a small business vary depending on the size of the business and the industry within which it operates. Generally, though, less overhead is always better. The less you spend on overhead costs, the more you can put toward generating revenue. Knowing how to cut down overhead costs is key to a healthy business.
Here are four steps for reducing overhead costs for small businesses:
1. Audit your current overhead
Facing the truth about your finances is scary. But if you don’t understand overhead expenses now, how will you know if your business is improving? You need a starting point, or benchmark, for overhead costs.
To gain a reference point, create a list of all your current overhead purchases. Look at every expense, no matter how small it might appear. You won’t know how to reduce overhead costs until you have an account of where your overhead is coming from. Small costs can add up, pushing your overhead spending over budget.
Pull the overhead expenses from your small business records for your list. Use supporting documents to make sure the list is accurate, such as invoices, receipts, and bank statements. Once you’ve done the audit, stop buying items you don’t use. For those items you can't operate without, look for better prices.
2. Go paperless
Easy and affordable ( and sometimes free) technology makes it simple for businesses to go paperless. Paperless options reduce costs and the time you spend on tasks that don’t generate revenue. Though you probably can’t eliminate all paper at your business, you can take steps to reduce paper use.
Moving documents to cloud-based resources cuts costs on printer maintenance, toner, and paper. Cloud storage also saves physical space at your business, plus the time it takes to manage paper files. You can keep digital customer records, inventory, and vendors, among other reports. Basic accounting software lets you digitally record and manage your business transactions.
3. Talk to employees
Employees are at the forefront of your business. Get your employees involved with reducing overhead. The extra eyes on your overhead give you another perspective on spending and allow employees to work together as a team to solve the issue.
Let employees share their ideas about ways to reduce overhead costs and to carry out the ideas that will work best. You could offer incentives for the employee that comes up with the solution that saves the most money.
4. Rent where it counts
If you’re trying to save on overhead expenses, consider renting property like buildings and equipment. Buying tends to be a more expensive and long-term commitment than renting.
Keep in mind that renting might be a higher fixed cost in the short-term. You can end your rental agreement more easily than you can get out of a purchase, however. If you expect your business to grow, renting might be the best option.
Do you have an extra office or workshop you don’t use? To reduce overhead expenses, you could sublease the space to another business. Use their rent payments to cover some of your overhead costs. When you sublease, you still have control of the property and can set rules for its use. If you plan to sublease a space you’re renting, make sure your landlord allows subleasing first. Always remember to use a contract when subleasing your business property.
Have you considered “renting” employees? One of your largest sources of overhead could be the salaries, payroll taxes, and benefits for your indirect labor. Indirect labor includes the employees that do not directly contribute to making products or providing services, such as an administrator. Depending on your industry, it might benefit your company to use contract staffing. This could reduce overhead costs from salaries and benefits for employees you are unsure about hiring or you only need for a short term.
Amanda Cameron is a content writer for Patriot Software, LLC. At Patriot, she explains difficult payroll and accounting topics for small business owners.