Smart ways to cut costs in your business

Starting and owning your own business can be expensive. Whether your business is brick-and-mortar, online or service based, you can expect recurring expenses ranging from rent to labor to equipment. In good times, overhead costs and operating expenses are usually manageable, and in times of economic uncertainty, cutting costs is likely necessary to improve profitability and remain competitive.

What are overhead costs and operating expenses?

Overhead costs and operating expenses are both types of expenses incurred by a business and represent different expense categories.

• Overhead costs tend to be fixed or semi-fixed amounts and are typically ongoing regardless of whether the business is generating revenue or sales. These costs are required to keep the business running and include items such as rent, utilities, insurance and salaries.
• Operating expenses are incurred in day-to-day operations and required for the business to produce or sell its product or service. They include items such as raw materials, transportation costs, marketing expenses and research. Unlike overhead costs, operating expenses can vary based on production or sales volume.

When identifying ways to optimize overall expenses, both overhead costs and operating expenses should be considered.

How to calculate overhead costs

There are two ways to calculate overhead costs.

1. Know and track your numbers. Ideally, you watch your income and expenses each month. By staying aware of your overhead expenses (your fixed and semi-fixed expenses), you should easily see if your overhead is increasing each month.
2. Analyze your “overhead rate”. Your overhead rate is a percentage calculated by dividing your overhead costs for a certain period by that period’s sales volume. This percentage enables you to compare your overhead percentage from one period to another (quarterly, yearly, etc.). Although it varies by your industry and type of business, a general rule of thumb is to target a ratio of less than 35%.

      Overhead rate = overhead costs / revenue

Smart ways to reduce costs in your business

Review current expenses and spending

Analyze your current monthly expenses including both overhead and operating expenses and determine which are essential to running your business; see if there is a possibility to reduce these. If you identify non-essential expenses, review and confirm that eliminating them will not affect your business operations. Some of these expenses may include:

• Entertainment
• Office supplies
• Unnecessary travel
• Unused subscriptions
• Food
• Miscellaneous inventory

Negotiate with your suppliers and vendors

As a valued customer, be ready to negotiate better pricing, payment terms or potential discounts on bulk items/services with your vendors/suppliers. Many will agree to reasonable terms in return for keeping a loyal relationship that provides business for both of you.

If you have many vendors/suppliers, consider leveraging bulk buying by consolidating the number of vendors/suppliers you utilize. Based on your industry, many vendors or wholesalers provide one-stop shops for the services/products you need to run your business.

Consider switching to vendors with less expensive pricing or alternative products, but keep in mind, cheaper prices doesn’t guarantee quality products or services and can cost more for your business long term.

Reduce your rent

Consider the following:

• Negotiate with your landlord. As a responsible, commercial tenant, negotiate your lease options with your landlord.
• Move. Reevaluate the size and location of your space to find a more cost-effective option.
• Share. If you don’t need a full-time office, consider renting a space at a communal office like WeWork. Consider sub-leasing available office space to earn some extra income.
• Go virtual. Remote work works; we all learned what a viable option this is during Covid. Bonus points: Your staff will likely love the idea.
• Purchase a commercial space/building. Many business owners don’t realize the power of purchasing a commercial space of their own for their business. Renting long term runs the risk of increases over time.
• Optimize business hours. Having a smaller staff on slower days can cut labor costs significantly. If some days are not profitable, consider closing on those days altogether. This in turn will also reduce your variable costs like utilities and supplies.

Lessen turnover

Losing staff, recruiting and then training new people is expensive. Work on your culture to reduce turnover. Create camaraderie, offer training and support, and plan company outings to keep your staff happy and engaged.

Outsourcing certain tasks to third-party service providers can save money normally spent on salaries, benefits and other payroll expenses. Outsourcing services include customer service, human resources, IT services and more.

Reassess your marketing budget

There are several ways to inexpensively market your business. Social media marketing, pay-per-click, content marketing, e-newsletters – they all work and are not expensive. Also, word-of-mouth marketing is of particular importance to small businesses, not only because it is a marketing strategy that requires little to no cost, but when executed correctly, can positively impact brand and performance.

Go paperless and embrace technology

Digital and cloud-based systems are not only the wave of the future; they are also the wave of the present. Reducing paper and printing costs can be a big savings for some companies. Also, automating administrative tasks like invoicing and client follow-up can help your business save money and time.

On the communications front, keep in-person meetings and travel to a minimum. Prioritize communication through email, Skype or virtual meetings when appropriate. This helps reduce travel costs such as food, lodging and gas.

Bring in a pro

Hiring an accountant, even on an ad hoc basis, can give you an expert’s opinion of your budget and overhead, and likely provide you with ideas you may not have considered on your own.

Final thoughts

While cutting costs is important in today’s competitive environment, it is equally important to maintain the quality of your product or service. Regularly evaluate your cost-cutting measures and their impact on your business so they align with your long-term goals.