Identifying and understanding your business overheads are paramount to the success of any business. Here are some great tips for managing your overhead expenditure to help you take charge of your finances.
WHAT ARE THE MAIN BUSINESS OVERHEADS?
Overheads are the ongoing costs that must be incurred to operate your business but are not directly attributed to creating your product or service. They are unavoidable and are part and parcel of being in business.
Some examples of overheads include but are not limited to:
- Employees: this is likely to be one of your major expenses and requires ongoing focus.
- Rent for office and other commercial space: it’s an opportune time to consider whether you can negotiate rents.
- Tax: your accountant will be able to work with you to ensure you claim all allowable deductions to help reduce the tax you pay.
- Utilities and insurance: including your phones and IT systems, gas and electricity.
- Business registrations and licenses: such as domain names, trademarks and copyright expenses.
- Travel costs: flights and hotel rooms.
- Training: the cost to ensure you and your employees are up-to-date with innovations and changes in your industry.
- Marketing and advertising: including branding and costs to maintain the business’s social media profile.
- Memberships: of professional bodies or other industry groups.
- Subscriptions: of professional journals, magazines or newspapers.
- Advisory costs: this includes accountant’s fees and other fees paid to advisers or business coaches.
FIXED AND VARIABLE COSTS
Overheads can be categorised into either fixed or variable costs. It is important to understand the distinction between these categories as this will help you understand where you have the opportunity to reduce costs and improve profitability.
Rental expense is a typical example of a fixed business cost, whereas direct labour would be an example of a variable cost. Variable cost will typically vary in accordance with production levels and or business activity.
There are opportunities to reduce both types of overheads, however, it is often easier to reduce variable overheads, for instance by cancelling subscriptions or switching to cheaper online versus in-person training. It is important to manage both your overheads and your direct costs to maintain your margins over time.
HOW TO STAY ON TOP OF BUSINESS OVERHEADS
While having to pay your overheads is unavoidable, there are many steps you can take to reduce them, which will help you to maintain, or even improve, your margins. These include:
- Find a reliable and knowledgeable accountant: Your accountant should be one of the key advisors to your business. Finding the right accountant with relevant experience is important. Make sure you review your business financials together with your accountant. They will be able to advise you on the steps to take to ensure you are not overpaying the tools and inputs you need to run your business.
- Understand what your overheads are: Before you can control the overheads you firstly need to understand them. Implementing cloud-based accounting software such as Intuit QuickBooks means you can see all your expenses in one place, from any device, 24/7.
- Perform a periodic review of all costs: Circumstances will change, and your costs should be adjusted accordingly. Currently, many employees are working from home. This is an opportunity to review your office space requirements and reduce rental costs. Remember to review insurance policies regularly to ensure you have the correct level of insurance cover and are paying the correct premium.
- Recalibrate your team: It is important to get your employee mix correct. Periodically review your team to ensure you have the right complement of full-time, part-time, casual, freelance or contract staff. While many businesses need a portion of their workforce to be full-time to ensure continuity, a substantial amount of work may be undertaken by casuals or contractors, helping to reduce staffing costs.
- Seasonal trends: Review your financials regularly to understand the seasonal trends in your industry. Perform a sensitivity analysis to under how your business is impacted by seasonal trends and what measures you can implement to manage this. For example, if you need seasonal workers during your peak periods, use this information to secure resources and negotiate on pricing ahead of time.
- Review your IT requirements: Moving the business’s network into the cloud can help you reduce your hardware and software costs. Consider software-as-a-service options so you are only paying for the technology you need.
- Negotiate with suppliers: Talk to your suppliers such as office supply firms about receiving a discount for bulk orders or if you pay your invoices before their due date.
- Ask for discounts: Make sure you talk to your utilities’ providers, including your telco and energy company, as well as your insurance broker, every year about whether they can offer you a better deal. Being vigilant about these costs can save you thousands over time.