How to Reduce Overhead Costs and Grow Your Business
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Struggling to maintain sustainable growth? Here's how to reduce overhead costs and grow your business
Guest contributor
Overhead costs are a necessary evil of running a business. Bills, technology, raw materials, and administrative costs are just some of the areas you'll need to contend with.
If you're reading this article, you might be worried about maintaining growth while dealing with mounting overheads. With worldwide inflation set to be at 5.8% in 2024, growth might seem unachievable. But there are always ways you can adapt your overhead budget to reach your goals.
How lower overhead costs help stimulate business growth
The idea of reducing costs and growing your business might sound like a pipedream. But it’s all about understanding how the two are connected. Overhead costs are not directly tied to specific business activities or production, but are necessary for overall operations. Overhead costs are considered an indirect cost because they are not directly related to a specific business activity. It's important to understand that there are different types of overhead and types of overhead costs, such as administrative, selling, manufacturing, fixed, variable, and semi-variable costs, which will be addressed in the following steps.
Managing overhead costs is a vital part of financial planning for companies of all sizes.
Frees up capital for growth initiatives and innovation
Business overhead costs can slowly eat away at your budget.
We all want to use our capital to invest in the latest business technology trends or other long-term investments that will get us ahead of competitors and deliver returns in the years to come.
But all too often, overheads eat into our ability to invest wisely. Cutting day-to-day running costs can be the key to opening the door to new initiatives. Every cent saved on overhead costs can be invested in growth, boosting your customer base and increasing profit. Reducing overhead costs can maximize profits and prevent them from negatively affecting net income, ensuring your business remains financially healthy.
Supports sustainable growth by enhancing financial stability
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Overhead costs can fluctuate throughout the year. Without proper control and financial oversight, any sudden increases can significantly impact your overhead budget, restricting your access to funds. That’s why so many businesses struggle to grow when burdened with overhead costs. Fixed overhead costs, such as rent and insurance, remain constant regardless of business activity and must be accounted for in your monthly expenses to ensure accurate budgeting and financial planning.
Fewer overheads create healthier finances. Price fluctuations will have less of an impact, and you can be more confident of sustainable long-term growth.
Minimizes financial risk and optimizes resource allocation
Businesses with lower ongoing costs can allocate funds more effectively. This means more control of overall finances, helping you use your resources to boost long-term strategy or automate operations.
Reducing the burden of overheads also improves your cash flow. Problems with cash flow are one of the main causes of financial risk.
So, reducing overheads allows you to put money into growth activity and reduces your risk.
Streamline operations for enhanced productivity and
scalability
By streamlining workflows and operations, you remove unnecessary or inefficient processes. Streamlining operations could reduce the overheads needed to support your activities. Streamlining can also minimize the time and resources spent on administrative tasks, especially by automating or eliminating routine activities. You might find that reducing handoffs requires fewer teams and less office space, reducing rent, heating, and lighting.
Simplification delivers more output from fewer resources, giving you a real productivity boost. Removing inefficient or low-value processes will also result in fewer errors or defects since your processes will be simplified. Reducing the need for office supplies is another benefit, as streamlined processes often require less paperwork and fewer materials.
All of these factors support your ability to scale up production. More straightforward processes reduce the risks of expanding output, giving you much greater scalability. Additionally, the resources that you have saved can be used to facilitate the expansion.
Steps to reduce overhead costs and grow your business
Reducing overhead expenses successfully requires a considered approach. Use the following steps as a guide, and you’ll be on the right path.
Invest in automation tools to streamline processes
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Automation has been growing in popularity in recent years. According to research and consultancy firm Gartner, 70% of organizations will implement structured automation by 2025 to gain greater flexibility and efficiency. In terms of reducing overhead costs, it’s a tried-and-tested strategy.
Repetitive, manual tasks are one of the biggest hurdles to growth. They can also produce considerable overhead costs. Automating these repetitive tasks can significantly reduce administrative overhead, such as the day-to-day operational costs of running a business. You’ll need to sustain a large workforce to keep up with admin. Plus, if you’re still relying on paper for manual processes, you’ll also need additional space and equipment for storage.
A good place to start is with professional services automation software created specifically to support growing businesses.
Automating certain accounting processes, in particular, reduces admin time, helps teams be productive, and improves resource allocation to optimize your company’s profitability. Moreover, these tools give you intelligent insights, helping you spot other processes where you can reduce expenses through automation.
Utilize cloud-based services to save on IT expenses
Today, businesses handle a high volume of files and data. The need for sufficient storage for all customer and employee information and other digital assets becomes critical.
This can be a big operation involving large overhead costs. While investing in warehousing space and servers can be beneficial, these require regular maintenance, the addition of backup servers, and tight security measures. Cloud-based services can help reduce operational expenses related to IT infrastructure, making it easier to manage the costs necessary to run the business.
As your business grows, your data infrastructure will no doubt grow with it. Cloud-based services can significantly reduce overhead expenses and have the added benefit of being scalable. A cloud storage provider handles the storage space, security, and hardware. You’ll only pay a subscription fee.
Of course, storage isn’t the only benefit of the cloud. Cloud-based software as a service (SaaS) providers give businesses access to incredible services from anywhere. Rather than purchasing software outright, you choose a plan based on your company’s size and requirements and pay a subscription fee. Cloud solutions also support efficient business running by providing scalable and flexible resources that adapt to your operational needs.
Below are some examples of cloud-based SaaS products that can help you reduce costs in different areas of business operations:
Video conferencing solutions
Collaboration tools
Project management software
Business intelligence tools
HR & recruitment software
Financial and accounting software
Promote a cost-conscious culture among employees
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Employees who say their company culture is positive are 3.8 times more likely to be engaged. Building your culture can also be a great opportunity to enforce a message of cost consciousness.
Creating this requires an organization-wide approach. All employees should be aware of spending, from admin to senior managers. Achieving this takes time. Consider the following steps:
Provide strong leadership from senior management demonstrating commitment to cost control.
Set a budget for each department to make sure that teams are more aware of their spending habits.
Educate employees on the importance of financial responsibility and the consequences of uncontrolled spending.
Set spending rules and penalties for breaching budgets.
Review employee perks regularly to ensure they align with cost-conscious goals and do not unnecessarily increase overhead.
Negotiate better terms with suppliers to reduce expenses
It’s likely that a significant portion of your overhead costs can be attributed to suppliers. Although you’ll have limited wiggle room as suppliers will set the payment terms, there is often room for negotiation. Negotiating with suppliers can help reduce direct costs and production costs for the goods or services your business produces, leading to more accurate cost allocation and improved profitability.
Suppliers are accustomed to customers seeking better terms, but you’ll need to prove that you are a valuable partner, particularly with new suppliers.
Consider offering access to a new market in return for a price reduction. For example, you can agree to use the supplier’s parts exclusively on products or services you deliver within the market.
Another option is to increase your order quantity. Suppliers will often offer discounts as an incentive for larger orders. If you’re confident of sales, ordering materials in bulk could provide considerable savings.
It is important to have an effective procurement process. This needs to evaluate potential suppliers to guarantee that you get the best fit, in terms of price and quantity. Don’t fall into the trap of automatically going to a certain supplier simply because you have used them in the past.
Review contracts and renegotiate for more favorable terms
What about contracts that are already in place? Changing terms part-way through a contract is more challenging, but it’s often a viable option, particularly if you have been with a supplier for a long time. Reviewing contracts regularly can help reduce the amount you are paying for ongoing services by identifying opportunities to cut unnecessary costs.
Consider what incentives you can offer. One approach might be to extend the contract’s length in exchange for a better rate. Renegotiating contracts can also lower your overall expense, helping you manage and minimize business costs.
If the supplier provides other services you use, consider extending the products or services that you receive in return for price reductions. However, you will need to ensure that these additional services deliver appropriate quality and value.
Monitor expenses closely to identify cost-saving
opportunities
Monitoring what you spend helps highlight what you can save. Conducting regular audits to gain a comprehensive view of your organization's finances is wise. You can do this through third-party providers, such as accountants, or using bookkeeping software internally.
Today, these solutions are easy for anyone to use, so you don't need accounting experience or technical know-how to get started. But they'll be invaluable in providing accurate real-time insights into your finances that help you spot cost-saving opportunities that you might otherwise have missed.
Implement energy-saving practices to cut utility costs
Energy consumption can be a huge source of overhead costs, from lighting to heating, computers, and other equipment. Utility bills and utilities such as electricity, water, and internet are significant components of overhead, and many of these are semi variable or variable overhead costs that can be managed through energy-saving practices. Introducing a more energy-conscious mindset into the office can help reduce these costs considerably. Energy management software can deliver insights into your energy consumption, allowing you to identify areas for improvement.
Energy-saving practices can take many different forms, including:
Switching to a hybrid or remote workforce to downsize office space
Introducing energy efficiency and sustainability training for employees
Reminding office staff about the importance of switching off devices when not in use
Introducing energy-efficient light bulbs to the workplace
Evaluate staffing levels and consider streamlining operations
Balancing your staffing levels is a significant way of cutting costs. Salaries are a major component of overhead costs, and adjusting staffing levels can help reduce operational costs. But this isn’t about slashing your workforce in half or letting go of employees on the highest salary.
You must carefully assess your needs and guarantee any adjustments won’t negatively impact business operations or customer service standards. Look at who performs which tasks and where there is overlap.
Can any roles be altered to streamline operations? It may also be that you need fewer full-time staff or can outsource certain job functions.
A smaller workforce will enable you to save money but also to have more effective teams. You can also provide better support for each employee, thus increasing employee engagement, efficiency, and overall work ethic.
Wrapping up
It doesn't matter how big or small your operation is; overhead costs can quickly become a millstone. For sustainable long-term growth, effective cost control is essential. From greater innovation to a more productive business, reducing overheads helps growth in many ways.
Today, we've explored how to reduce overhead costs. So, why not implement the steps explored above? This process may take some time, but you'll quickly reap the benefits of a cost-efficient business.
Wondering where to begin with cost-cutting? Why not streamline your booking and admin processes with an online booking system for small business?