How SMEs can Lower the Overhead Costs
Understanding the overhead costs and determining the ways to reduce overhead cost is an essential part to eliminate wasteful and non-profit producing expenses. The overhead costs are the cost that arises from day-to-day business operations and not directly associated with the production process of the company. The key overhead costs of every small business are licenses and permits, rents, property taxes, utilities, office supplies, software administrative costs, IT services, Loan installments, marketing, advertising, etc.
1. Outsourcing specific duties:
Rather than hiring employees for irregular jobs and responsibilities, the small business can hire a freelance workers and outsource the tasks to third-party service providers. In this way, the company will be able to reduce the cost of long-term salaries, employee insurance, health benefits, and pension costs, and thus, the overhead cost will reduce drastically.
2. Investing in an accountant:
A highly skilled and professional accountant can help the small business to reduce overhead costs by analyzing the sources of unnecessary overhead costs and by ensuring accuracy and proper budget for finances. Though hiring a professional accountant can increase the cost of salary, in the long-run, the accountant will help to manage tax and legal policies so that cost of government fees can be reduced.
3. Cutting the cost of office space:
The rent for office space is one of the significant overhead costs that increases the overall expenses of the small business. For this, the small business owner needs to reevaluate whether the size and location of the office space are efficient and whether the business can be shifted to a smaller place in a different location with low rents. Moreover, creating an online platform can help to reduce the need for large and costly office space to reduce overhead costs. Additionally, the small business should adopt a remote working policy for the different employees such as the accountants so that low-cost smaller office space is enough for the business operations.
4. Renting instead of buying:
equipment purchasing cost is very heavy on the small business due to lack of capital. Spending finances on equipment can reduce cash flow in the business and increase overhead costs significantly. For this, the small business should rent necessary equipment when needed instead of buying the equipment for the long-term and bear the cost of maintenance and repayments.
5. Environment friendly utilities:
Any business cannot avoid utility costs but it can use efficient resources to reduce overhead costs. The small business should go paperless by minimizing uses of paper and ink in business operations by adopting digital transformation such as the use of computers, emails, cloud storage, electric invoices, etc. This way, the cost of paper, ink, printers, and storage space will reduce drastically. Moreover, the small business should use eco-friendly utility alternatives such as LED bulbs, green outlets, and energy-saving power strips would reduce power consumption and thus, help to reduce overhead costs by controlling electricity costs.
6. Switching to digital communications:
The cost of telephone bills can be reduced by switching to an internet-based communication system such as using Skype, Google Voice, Zoom, etc. Thus, the overall overhead cost of the business will decrease. A small business should regularly reevaluate the cost of international calling and negotiate service package costs with the service providers to get the most efficient package to reduce the overhead cost.
7. Developing brand ambassadors:
Marketing and advertising costs consume a large portion of the business budget. A business can spend hundreds of dollars on marketing and advertising but may not be able to increase sales and make profits covering the overhead costs. For this, a small business can leverage the most effective marketing tool which is the loyal customers, and use the strategy of transforming the clients into brand ambassadors. In this way, the company would provide the best quality and value-creating products and services to the clients who would then convey the information on the quality and characteristics of the products and services to friends and family. Thus, the business will be able to reach a larger number of potential customers without bearing a high overhead cost of marketing and advertising.
8. Controlling insurance premium:
Every business requires insurance which increases the overhead cost due to premium payments. In this case, a small business should follow all the rules and regulations of the insurance company and adopt precautionary safety measures in the business premise so that there are fewer risks of accidents. Thus, a lower premium will be charged to the company and it will reduce overhead costs.
9. Reducing debt:
The cost of interest on debt financing can increase the overhead cost of the business for the long-term. In this case, a small business should use alternative sources of financing to reduce interest expense and overhead costs. For example, small businesses should use invoice financing to meet the short-term financing needs when required rather than taking bank loans. In this way, the business will be able to collect funds in the shortest time at the lowest cost and there will be no need for interest payments. Thus, invoice financing can help to reduce the overhead cost in businesses.
Therefore, it can be found that there are many ways and strategies that the business can adopt to reduce overhead costs. Invoice financing can significantly help in reducing overhead costs by eliminating frequent interest expenses, reducing the cost of loan payment management, and also providing low-cost financing sources to capture sudden opportunities to reduce operational costs. This way, the decrease in overhead cost can reduce the overall expenses of a small business and help it to be more profitable.