How to Cut Back on Overhead Costs and Increase Profit Margins?

Running a business is complicated. Taking a step back from time to time can be helpful and reduce the complications to a simple profit equation. Is more money coming in than going out?

It’s unsustainable to run your business at a loss for a significant period of time. The only solution to solve the equation is to either make more sales or cut expenses.

While every business has expenses, many overhead costs can be reduced or even eliminated with the right changes. A significant number of companies end up with inflated overhead costs based on out-of-date thinking or a previous business model that no longer applies. Reducing these costs is critical to increasing profits and ensuring your business is out of the red.

Overhead costs vs. Operating Costs

Expenses can be separated into two categories operating costs and overhead costs:

  • Operating costs: The day-to-day costs related to producing, selling, and marketing your product or service. Examples include materials, equipment, etc.
  • Overhead costs: Ongoing costs not directly related to the product. Overhead costs are what your business would still have to pay if it didn’t produce or sell anything. Examples include rent, utilities, accounting services, insurance, etc.

It can be easy to save time by setting up automatic monthly payments for overhead costs. Then you’ll have more time to focus on selling your product or service and paying your operating costs. With that being said, overhead costs can sneak up on you, and since they’re not directly related to revenue generation, they should be the first expense you look at cutting.

So, what can you do to cut back on overhead costs?

1. Automate Payments

However you handle payments, whether you take cards, cash, or receive payments online, there are benefits to automation. Reconciling payments, issuing refunds, and processing and chargeback fees associated with credit cards all add up to a significant chunk of time and money.

Automating your payment process reduces the cost of getting paid. By removing manual processes and utilizing services with higher conversion rates, you can help keep costs low and profits high.

2. Downsize your Business Space

Business space such as an office, storefront, storage, or production facility typically make up a significant portion of overhead costs. Purchasing a space can be a good option in the long run, assuming the property’s value will increase. But most businesses don’t have that level of capital available to them and instead have to rent.

Renting also gives you the flexibility to change locations and expand or downsize based on your finances. Businesses often overestimate the space they need and end up having oversized facilities that cost too much.

One of the first overhead costs to target when cutting expenses should be your business space. Re-evaluate both its size and location to determine if you can save money without significantly affecting your operations. This could mean rearranging equipment to make better use of the space, finding a cheaper location if possible, or potentially reducing office space by asking employees to work from home.

3. Transition to Remote Work

For a lot of employees, the pandemic completely transformed their relationship with work. Now that remote work is normalized, many companies are embracing it. Many businesses are actually seeing significant benefits to working from home or hybrid work models where staff split time between their home office and the businesses office.

Where possible, embracing remote work allows businesses to drastically downsize their office space, saving money on rent, utilities, and potentially equipment. Instead of extensive facilities to house your entire workforce, you can switch to a remote working model. This will allow you to rent a smaller business space for meetings, interviews, and other functions improved by face-to-face interaction while saving on rent.

While some business leaders have concerns about reduced output when employees work from home, research indicates the opposite. People working from home show a productivity increase of 13%. With no commutes, shorter breaks, and staff able to work in the comfort of their own home, remote work has the potential to reduce overhead costs and improve employee performance.

4. Outsource Operations

Controlling every workflow and performing everything in-house can lead to high overhead costs. Companies can save money by outsourcing specific tasks to specialists, particularly when you only need a narrow set of knowledge and expertise for a short period of time. Examples include accounting services to pay your taxes or marketing agencies when releasing a new product.

Whatever your company needs, there are now developed freelancer networks you can tap into, so you only have to pay for your specific needs. Rather than taking on all the staffing and associated costs of hiring more people (recruitment, larger office space, additional equipment, etc.), outsourcing streamlines operations and improves flexibility. Plus, you can end the relationship or reduce freelancer hours whenever you want.

5. Review Utility Contracts

There are some overhead expenses, such as utilities, that you set up and forget about at the start-up stage of your business. While we all need power, electricity, internet, and heating, they aren’t the most exciting part of running a business.

However, often companies gradually raise prices, hoping we won’t take the time to shop around and look for a better deal. By reviewing your utility contracts and either renegotiating or finding new suppliers with better terms, you can save significant money.

Proactively Managing Overhead Costs

These tips come down to proactively managing your overhead costs and remaining open to new options. Don’t set up your overhead costs and assume they’re fixed for the foreseeable future. Reassess operations and trim the fat if overhead costs exceed your needs. Staying on top of your overhead costs can make a real difference to your bottom line.