Ways to Lower Overhead Costs

When it comes to cutting costs, it is advised to first focus on reducing direct costs. These are the expenses that can be directly related to an individual sale. Examples are the wholesale product purchased for resale, direct labor and equipment rented for a project, or any other expense that you can associate with an individual sale of product or service. Reducing direct costs means that you keep more of your hard-earned sales revenue in your pocket. Imagine if your margin, the amount of the sale, less the expenses attributed to it is 40%. This means you keep 40 cents out of each dollar of sales revenue to pay your overhead expenses. What if you doubled your revenue? You would still keep only 40 cents out of each dollar. By reducing direct cost, let’s say to 50%, you now keep 50 cents of each dollar earned.

Once you have tightened up your direct costs, the next place you can plug cash-flow leaks is to reduce overhead expenses. These are all the other expenses on your Profit & Loss report below the Gross Profit line. They include advertising and promotion, bank fees, administrative expenses, phone and internet, insurance, subscriptions, rent, and taxes.

 

Let’s Get to Work!

If you are like most business owners, the task of reviewing expenses is not a fun one. But keep this in mind, each dollar of expense you eliminate is money in your pocket, now and for the months to follow. Begin by setting aside a 2-hour block of time, find a quiet spot, and very carefully review the following documents. Your bank statements, your credit card statements, and your business invoices. You want to go through these line-item by line-item and carefully scrutinize each charge. As you review each charge, follow this basic rule. If a charge doesn’t help you to get a new customer or to keep an existing customer, ask the question, “Can it be eliminated?”

There are, of course, expenses that are absolutely necessary for the operation of the business; taxes, insurance, rent, utilities, etc. They do not help get a new customer or keep existing ones. Yet they are mandatory cost of doing business.

However, for the many costs incurred in the business that do not fall into the category of mandatory cost, let’s take a look at ideas to reduce them.

 

1. Credit Cards and Bank Accounts

First, pay extremely close attention to the charges on your credit card and bank statements. If you don’t know what the charge is, view the statement online. You can drill down to a brief description that includes a phone number.

 

2. Overhead Services

Look at all the services you use to run your business and see if you can negotiate lower prices or find a less expensive alternative.

• Internet and Phone – Negotiate a better plan that fits your business
• Office Supplies – Manage office supply inventory to stock only what you truly need. Know when to reorder and how much.
• Janitorial Services – Examine which core services are needed and how often.
• Trash Pickup – Look to see if there are other companies that provide the same service for less.
• Repairs and Maintenance – Check to see if there are preventive maintenance agreements available for your industry or profession.
• Insurance – When reviewing insurance, discuss your coverage with a commercial insurance agent to make sure you have the coverage you need for your business.

You get the picture. Review all your overhead costs and scrutinize if they are necessary, are you over-paying, and what alternatives are available.

 

3. Outsourcing

If you tend to keep all your professional services in-house, consider the possibility of outsourcing those services moving forward. The most common ones to consider are accounting, bookkeeping, IT, and maintenance and repair. If none of these require someone full-time, outsourcing can offer substantial savings. There are highly qualified professionals in places like India, Taiwan, and the Philippines who you can hire for a fraction of the cost of an employee in a western country. The Philippines boasts a 95.6% literacy rate and has a track record of “exporting” virtual assistants across the world. Taiwan specializes in programming and databases. And India has a world-class IT infrastructure.

Another major advantage to outsourcing involves the classification of the worker. When you outsource, you may be able to designate the personnel as contractors versus employees. This can be an additional savings for your business. One note of caution. There are rules and regulations regarding the classification of contractors or employees. Check with your Accountant or tax professional to be sure you know the Do’s and the Don’ts of hiring contractors in your business.

 

4. Company Cost Cutting Initiatives

Offer your employees the opportunity to participate in a cost reduction program. Truth be told, your employees know how to reduce or even eliminate substantial costs in literally every phase of their job. And to ensure the success of this type of program, bonus them a percentage of the first-year savings. Just be sure you take each submission seriously and notify the employees of the outcome.

 

5. Overtime

If possible, eliminate overtime. Overtime is OK if needed to catch up with demand, but if overtime is required every week, consider hiring an additional employee and avoid paying the overtime premium. If there is seasonal or unusual demand, investigate part-time or seasonal employees to fill in.

 

6. Consolidate Debt

The objective here is to two-fold; reduce the amount of monthly payments on outstanding debt and to reduce the amount of interest you pay. Consolidating debt into one loan typically results in one payment that is less than the sum of payments you have been making. With a consolidated loan, it is far easier to launch a campaign to pay it down faster.

 

7. Merchant Account Services – Credit Card Processors

Compare their discount rates with other vendors and negotiate the best rates and services. Be especially careful about hidden fees and charges that add up to substantial differences between card processing companies.

 

8. Travel

Does your business require a significant amount of travel? Look to see if you can replace travel with video conferencing. With current technology, you can turn on your webcam and it’s not much different than sitting directly across the table from your customer.

 

9. Compensation Model

Another area to look over is your compensation model. If your business delivers a specific result, then set up a “results-based” compensation model. This works quite well provided the sales goals are communicated, specific, realistic, and attainable.

 

To Conclude

The strategy is quite simple to understand; reduce costs wherever possible. However, look beyond the monetary savings you could enjoy with cutting costs. What other factors are important? Is the expense normal and necessary in generating sales? Consider the following test:

Does the expense:

• Attract a new customer?
• Retain an existing customer?
• Sell more to an existing customer?

If not, then:

• Is the expense mandatory
• Is it necessary to the business

If none of these tests are met for an expense, eliminate it. If yes, then see what you can do to reduce it.

Before you decide to look elsewhere for a less expensive supplier, consider the relationship with the vendor, the quality of the product or service, timeliness and ability to deliver, their customer service, billing and payment terms. There may be a viable reason to pay the additional expense when it is vital to the smooth operation of your company.