How to Reduce Overhead Costs: 7 Practical Tips for Businesses
Having trouble managing your overhead expenses? These 7 tips on how to reduce overhead costs show the top methods to cut back on your expenses with minimal risks.
Overhead costs meaning
First things first, what is an overhead cost?
By definition, overhead costs are the expenses you incur from running your business. These ongoing costs are essential to maintaining your day-to-day operations. This means that you need to pay them regardless of your current financial performance, whether you’ve made an income or not.
Here's the catch. Overhead costs don't have a direct link to profit generation. Operating expenses — the amount you spend to create products and perform services — are the ones connected to making a profit.
3 types of overhead costs
To avoid overspending, you need to keep your overhead costs at bay. Knowing what those costs are is a good start. By familiarizing where your money goes, you can devise effective business cost-cutting measures.
There are three (3) types of overhead costs:
- Fixed costs. Fixed costs are the expenses that remain the same irrespective of your income or business activity.
Fixed costs examples:
- Software subscriptions
- Government fees (e.g., taxes)
- Insurance premiums
- Variable costs. These costs change based on your sales volume. The changes are directly proportional to your profits — if your sales increase, your variable costs will also increase and vice versa.
Variable costs examples:
- Legal costs
- Office supplies
- Marketing budget
- Sales commissions
- Semi-variable costs. Also known as hybrid costs, semi-variable costs are a combination of both fixed and variable costs. Like fixed costs, there’s a fixed amount for a certain level of production or business activity. However, it becomes a variable cost once the said level is exceeded.
Semi-variable costs examples:
- Hourly wages
- Vehicle expenses
- Electricity costs
- Telephone bills
An effective budget plan for the costs outlined above is essential to keeping your bottom line healthy. Otherwise, you should consider the overhead cost reduction strategies listed in the next section.
How to cut overhead costs? 7 tips to consider
Here are some of the practical ways to reduce your overhead costs:
1. Cut back on your office rent
The dollars you pay for your company’s office space can easily eat up a huge chunk of your budget. Here are some ways to reduce the amount you pay for it:
- Start with a virtual office. If you’re just starting your business, a physical office location may not be a priority. This is especially true if you’re offering services or selling your products via e-commerce platforms.
- Consider hybrid or remote work arrangements. If you seldom interact with your customers face-to-face, both work arrangements reduce your need for a huge office space. If you have over 100 employees, you can also use workplace management software to organize their schedules and seating arrangements.
- Move to a smaller office space with lower rental fees. If much of your office space is left unused, consider moving to a smaller office space with enough seating capacity for your team.
Aside from saving on rental fees, cutting back on your office expenditures can also lower your utility bills like water and electricity bills and office materials.
2. Reduce your staffing costs
Does your business have lean months or slow periods? If you do, you can look at reducing your staffing costs to lessen the overhead expenses associated with having employees (e.g., wages, benefits, taxes).
Instead of hiring full-time employees, paying for their benefits and investing in their equipment, you can try these strategies instead.
- Outsourcing non-core services. Outsourcing lets you work with third-party companies that provide scalable solutions based on your current business needs and budget. Most outsourcing companies offer end-to-end services. In this setup, they handle all administrative and management tasks on your behalf. This includes recruitment, equipment, office space, training and employee management.
- Working with freelancers. Freelancers work with you directly to provide the service/s you need. Writing and web designing, for instance, are some of the common services offered by freelancers.
If you want to try any of these two options, make sure to conduct due diligence before signing any engagement. By doing so, you can guarantee the trustworthiness of your chosen service provider.
3. Go green
Skyrocketing utility bills are no fun, whether it’s for your personal or business consumption. However, you need electricity, water, phone and internet to perform business activities with ease.
Good thing, going green — or the act of implementing eco-friendly measures — can help you lower your utility bills. Here are two ways to do it.
- Use energy-efficient appliances. Energy-efficient appliances can make your monthly electric bills more affordable.
- Go paperless. You can practice online file-sharing and use email and online messaging apps when submitting reports instead of printing everything on paper.
- Upgrade your equipment. Maintaining outdated computer systems and software may be too expensive. They also slow down certain processes.
Though you may need to shell out some cash at first, investing in energy-efficient appliances and equipment upgrades can be worthwhile investments eventually.
4. Write off your tax-deductible expenses
Your business can be eligible for deductions on some business taxes. If your business has tax-deductible expenses, make sure to claim it to reduce the amount of taxes you need to pay.
The official website of the Government of Canada summarizes information about taxes on this web page. Use it to discover any tax benefits your business may be eligible for.
Need the help of experts in managing your business taxes? Our accountants are ready to lend a hand.
5. Improve your processes
Inefficient processes hamper your employees’ productivity and prevent them from responding quickly to changing business demands.As a result, you can waste a significant amount of time completing tasks or projects that you can finish quickly only if you have updated workflows and tools. And in business, time means money.
To address this, analyze your existing processes and make sure that your employees are well-guided on new workflows and tools you plan to implement.
6. Manage your insurance plans
There's a possibility that your business might be paying for insurance plans that you don’t need.
To ensure every dollar you spend on insurances counts:
- Always review your existing plans every year.
- Consult reliable advisers and trusted sources to help you check where you can safely cut costs.
- Compare providers to find the most competitive insurance plans in terms of scope and rates.
- Make sure your business is not over-insured.
7. Review your contracts with suppliers
Always evaluate your contracts with suppliers and other third-party service providers to make sure they’re still aligned with your business needs and budget. If the need arises, see if you can renegotiate the terms and remove unnecessary services.
Cost-cutting should be intentional yet sustainable
Like a well-oiled machine, a business with proper equipment, good office space, skilled employees and enough marketing and advertising efforts can reach its intended goals.
However, if these overheads are drilling a hole in your bottom line, it’s time to assess if you can either:
- cut back on your expenses or
- improve the efficiency of your existing resources to obtain their maximum value.
The tips above can serve as your guide to getting started,
As a recap, try to cut back on your office rent, reduce your staffing costs and write off your tax-deductible expenses. Going green and improving your processes, especially the inefficient ones, can also work. You can also manage your insurance plans and review your contracts with suppliers.
We hope any of these tips are helpful for you. Most importantly, make sure to have a thorough look at your business expenses and processes. Doing so can help you identify the most appropriate plan of action to make them more efficient and value-adding.
Outsource your non-core tasks to the experts
If you’re looking for more ways to cut costs, consider outsourcing some or all your finance and accounting duties to the experts. They may be non-core tasks for you, but to us, they’re our core services.
With this, we can guarantee that we’ll handle your books and fulfill your financial reporting duties to the best of our abilities.
Get in touch with our experts today to learn our finance and accounting solutions for your company. You can also download a copy of our whitepaper, Your Talent Sourcing Partner, to find out how we invest in finding suitable and qualified talents for our global clients.