Analyzing overhead costs is vital in a business’ early stages

By November 9, 2017 Blog No Comments

When a dream of owning a small business comes into view, the little details likely play a small role, if any. But as a plan comes together, those little details can become big issues.

Overhead costs — those fixed expenses that make the day-to-day business happen, from office space to equipment to supplies — aren’t much fun to consider, but they’re a major factor for new small businesses. Owners have to determine how the costs match up with their plans and revenue goals. And as the business goes on, that never really goes away. When times are tough, small business owners may find that they have to cut overhead costs to stay afloat.

Here’s a look at how those costs can be managed for small business owners looking to cut back and new owners looking to get a smart start on their entrepreneurial efforts.

 

Go low from the beginning

A new small business owner might be overwhelmed at the list of overhead costs. Some businesses, especially those that can be run from home, have naturally lower overhead. Larry Alton mentions several such businesses in a story for Small Business Trends, including home childcare, teaching/consulting, handyman repair work and freelance writing. The goal, he says, is hanging onto revenue.

“There’s nothing more frustrating than bringing in a high volume of sales and enjoying big revenue numbers, only to see all of the profits dwindle away at the hands of superfluous expenses,” he writes. “If you want to keep more of your money, you should be focused on driving down overhead expenses.”

 

Office space

For those businesses that can’t go the from-home route, this will naturally be a top expense. Some companies may need a great deal of space, others can get by with smaller quarters. A new business owner will need to weigh the costs of rental space, and determine if the lease’s length works with the overall plan. In a story for Entrepreneur, Sujan Patel recommends considering how the business could grow in the near future.

“In the early phases of a startup, your growth could come in fits and starts — or be explosive,” Patel writes. “In any case, you’re likely to add people. If you’re certain that private office space is necessary, think carefully about how much space you need, based on your projections. You don’t want to be locked into a commercial lease with zero room for growth and expansion.”

But Patel emphasizes avoiding unnecessary expenses, and that applies to office space. As it can be a major investment, there must be a clear need.

“Will your business model benefit from private space?” he asks. “Will it improve the efficiency of workflows at your startup, the team dynamic or the client experience? Commercial office space can definitely lend trust and authority to a startup in the eye of the public, investors and clients; but ask yourself if it’s absolutely necessary at this current time in your startup phase.”

 

Reuse, recycle

Follow in the footsteps of homeowners when it comes to business recycling and energy efficiency. This may not be a top priority on an overhead-reduction plan, but any savings that come from these efforts can help. Juan Rodriguez includes this in a story for The Balance.

“Any item that can be reused such as paper, folders and so on should be reused,” Rodriguez says. “Items that cannot be reused should be recycled whenever possible as this will not only reduce your purchasing costs, it could also reduce your trash collection bill. Be sure to look for new alternatives and use energy efficient bulbs, equipment and vehicles.”

 

Technology

Cloud computing may be a smart way to help manage overhead. Not only can it be more cost-effective in regards to the equipment and software needed for day-to-day operations, but it also allows greater flexibility, as Chirantan Basu writes for chron.com.

“This is particularly helpful for small businesses operating on a tight budget,” Basu explains. “They can rent software applications and storage space as required. This avoids the risk of installing expensive systems, only to discover that they are insufficient for the company’s needs. Cloud computing turns fixed costs into variable costs. Businesses use and pay for only what they need, which reduces fixed overhead costs.”

 

Listen to other voices

A small business owner that is in cost-reduction mode might assume he or she knows what overhead options can be cut. Some other opinions may be helpful before any reductions start. Megan Sullivan recommends brainstorming with employees in a story for Intuit Quickbooks.

“If you have a staff, ask them for their input on where money can be saved,” she says. “Depending on the size of your organization, you might even want to offer incentives for the idea that saves the most, the idea that is the most innovative, etc. This type of collaboration often leads to more opportunities than you could find on your own.”

 

Paper

It may seem to be a minor expense, but those costs add up. If employees are printing out loads of documents that can easily be shared electronically, paper could be an area to cut. Some businesses can take an aggressive approach and go completely paperless, but many may need to keep it on a more limited basis, as Sullivan writes.

“While you may not be able to completely eliminate paper from your business, you can probably greatly reduce the amount of paper you use, which will allow you to save on printers, ink/toner, paper and storage space,” she explains. “Back up all of your documents to the cloud or on a drive, then shred any unnecessary files. You can then sell the filing cabinets that held them and pocket a little extra cash.”

 

Set an example

It’s hard for employees to deal with cutbacks when the boss is living the high life. Rather than potentially damage overall morale, make overhead cuts apply to the leadership as well, including travel expenses. John Hall, CEO and cofounder of Influence & Co., wrote about taking a thrifty approach in a story for Inc.com, saying, “A leader’s behavior has a powerful influence on the behavior of others in the organization.”

“Just because you’re an executive doesn’t mean you need five-star hotels and fine dining,” he explains. “You can instill values in your staff by making a conscious effort to save money or unintentionally promote wasteful spending by living lavishly on business trips. If your employees see you throwing away money like it’s nothing, do you really expect them not to do the same? Even if you set spending limits, the message is clear — and this carelessness will nestle its way into other areas of the business.”