17 Things You Can Do To Reduce Your Overhead Costs Today
“I would love to scale my business, David. But I am really struggling with cash flow issues right now.”
I hear this every single day from small to medium business owners. They have a great product and a loyal customer base, yet they still can’t seem to make ends meet and cash flow is always a concern. While it isn’t uncommon to have cash flow issues early on in a business, there are many things that you do to to keep on top of your overhead costs and avoid these issues all together.
What are Overhead Costs?
Overhead costs can be defined as the expenses that are incurred by the daily activities of running a business. It can be calculated in a fixed monthly or annual period. The everyday expenses that contribute to overhead costs include factors such as rent, utilities, insurance, administrative tasks, accounting and bookkeeping, sales and marketing, and so on. It is important to note that overhead costs do not include the production expenses to produce the goods or services you are selling. In order to optimize the cash flow to your business and still be profitable, one of the easiest ways to do so is by reducing overhead costs.
Here are my top seventeen things that you should should look at when wanting to reduce your overhead costs in your business.
- Run a full benefits report (1-2x/yr) to get the true cost of your each team memeber. Include items like salary, bonuses, employer share taxes and HR compliance costs as well as the $ value benefits. This information will be beneficial when trying to make important budgeting decisions.
- Set up a compensation model that is tied to results not to time served. Looking at the time spent can cause unnecessary stress since those metrics can be a distraction from looking at the bigger picture.
- Restructure your bonus systems. Bonuses and benefits are not “rights” but tied to performance (both individual and company). Any bonus that is regular and expected soon becomes “base”. When it comes to creative and interesting work let intrinsic rewards rule vs. monetary rewards.
- Trim excess staff. Most service and administrative departments can be cut by 25% with no impact on quality of work. Many can handle a 33% cut with no significant negative impact.
- Stop the “make it work” culture. The best way to do that is to have full plates that force workers to prioritize and leave lower level items undone, or done good enough. It is important to actively communicate with your team on a daily basis, such as by using emails or setting up social networks, to prevent work overload from happening.
- Cut wasteful meetings (or at least cut time in half). Go into each meeting with a clear cut goal and agenda in writing.
- Get over your fear of firing people. Although it may be hard for the decision makers to make the cut, it is crucial to understand that low performers in the workplace cost too much money to keep them on the staff.
- Scrutinize ROI and if it’s high, do it. This measure goes for just about everything.
- Consider leasing the workplace vs owning it. Leasing makes sense in a lot of different situations so don’t make owning your default.
- Consider customizing off the shelf vs custom creating. Don’t waste time or resources reinventing the wheel. This can prevent workload to pile up and burnout to happen.
- Consider hosted solutions vs proprietary.
- Negotiate HARD! (On price AND terms). This is a tool that is essential in any business setting. Learn the art of negotiation and use it often.
- Be careful not to scatter your resources too wide. Organization is a key factor that can help reduce overhead costs. Focus on your fewer and better to keep on top of costs.
- After a period of big growth and profits, be careful to revisit R&D costs and make decisions based on updated data.
- Get clear on all the costs of inventory: cost of capital; storage; insurance; etc. This is often overlooked but plays a big part in your bottom line.
- Consider selling off or writing off old inventory.
- Set optimal inventory levels and stick to them. (Find ways to safely reduce.)
And last but not least ask yourself the following about each and every expense that comes across your desk: “If I eliminated this cost would I really lose business?” If the answer is no, then don’t spend the money. It is important to understand that you cannot run a business without some overhead. However, finding ways to maximize your productivity while minimizing those operating costs can relieve some stress and can generate more profit for you at a more efficient rate.