High overhead can strangle the profit out of a business. Companies that struggle to control their unseen, hidden costs such as rent, utilities, office supplies, and payroll will ultimately find their profit margin eroding. The key to any successful company is its ability to reduce overhead costs while maintaining productivity. Effectively managing these costs can be achieved in a number of ways.
To get started, try these four cost reduction techniques listed below.
- Review, review and review some more.
Updated accounting records show every expenditure and provide a great overview of business performance and cost structure. Before changes can be made, it’s essential to know where the money is being spent and determine where waste is present. Take the time to ensure the chart of accounts is optimized for the business and provides the right amount of detail. Too often we see clients use too many accounts, trying to get more detail, when a good memo or description of the transaction would be more helpful.
Review the books carefully; look for overhead costs that are no longer necessary, too high in price, or open to efficiencies. Determine what can be eliminated, as well as what is providing the greatest return on investment. And don’t be afraid to ask the hard questions. While the answers may be hard pills to swallow, the business will emerge from this process better prepared to lead in the marketplace, or at least put more money in the owner’s pocket.
- Analyze third-party contracts.
Vendors make it a point to sign businesses to multi-year contracts for one simple reason: it benefits them. With this in mind, take a look at any third-party contract that may be currently in place. Does it still fulfill the team’s needs or has the business changed so much that the vendor’s contract is no longer as beneficial as it once was? Evaluate all contracts annually and re-negotiate the terms, if needed. It may entail more paperwork, but the long-term impact will help lower the company’s overhead costs going forward. Pay special attention to automatic price adjustments and the frequency of those adjustments. 5% might not seem like a lot but spaced out over a couple years really adds up, especially when factoring in the compounding of those increases.
- Hire freelancers or contract employees.
To make the numbers work, get creative. Today’s marketplace embraces hiring contractors on an as-needed basis. These contractors can work as needed, and depending on your business, can work remotely, or even “in the cloud.” Hiring off-site workers not only reduces the need for purchasing additional office space – which can be costly – but also negates the need for incurring the health insurance and other benefit costs associated with full-time employees. Adopting a “think outside the box” mentality with regards to staffing can help control overhead payroll expenses, without sacrificing staff quality.
- Evaluate the space.
The easiest place to begin when trying to reduce overhead costs is evaluating the office space from the inside, out. Look around. If there is space not being used, consider downgrading to a smaller office – less square feet typically equals less cost. Also, are overhead lights, desk lamps and computers being left on after hours? Politely remind employees to turn off all power supplies at the end of the day to help decrease the utility bill.
If office recycling bins are overflowing with paper (the average worker uses 10,000 sheets of paper a year), consider transitioning to a “green” office that embraces printing on both sides of a sheet of paper and/or backing up all documents to the cloud or a server. This will eliminate the need for using bulky filing cabinets, while driving down printer ink, toner and paper costs. Many Lucrum clients are doing away with paper records in favor of scanning to reduce the amount of storage space required.
Controlling overhead costs should be on a company’s daily to-do list. A business that commits to responsible spending is more likely to gain traction in the marketplace and to succeed. When overhead costs go unmonitored, profits are slowly drained away with little to show for it.
If your business needs help controlling costs, reach out to Lucrum Consulting. We can help you gain efficiency, identify opportunities to reduce overhead costs, and overall, help you improve your profit margin.