How to Reduce Overhead Costs for Small Businesses

When business is slow, cutting overhead costs is normally one of the easiest ways to reduce losses and return your business to profitability. Raw materials, inventory and other non-overhead expenses used to create revenue are vital to the business and usually more difficult to cut down on. Below are some suggestions for reducing some of the most common overhead expenses.

How Overhead Costs Work

Business overhead costs are expenses that are related to the day-to-day running of a business. Reducing overhead costs is important in a business downturn.

Overhead expenses are independent of revenue and must be paid whether the business is in a profit or lossposition. Overhead costs do not include expenses arising from the production of goods or services. For example, if your business is making furniture, the cost of lumber is a raw material and so is not included in overhead.

Overhead costs can include fixed monthly or annual costs (such as leases, insurance, or salaries) or expenses that vary from month to month due to the level of business activity (such as sales promotions or repairs). 

Rent/Lease

Lease costs of the business premises (or mortgage costs if purchased). Lease costs can be reduced by negotiating a new deal with the landlord, moving your business to less expensive premises, or if your business is suitable, converting it to a home-based business.

Utilities

Utilities include electricity, gas, water, sewer, phone and internet service. There are a number of ways to reduce your utilities overhead and help the planet in the process. Mobile phone, long distance, and internet usage should be reviewed on an annual basis to determine the levels of service required – there may be potential cost savings from switching to lower-cost plans.

Insurance

Businesses typically need insurance coverage, which may include:

• Property insurance for the business premises and equipment
• General liability insurance to protect your business from liability arising from negligence
• Professional liability insurance to protect your business from liability arising from malpractice if your business is of a professional nature
• Business interruption insurance to protect your business in the case of unforeseen closure.

Get quotes from multiple insurers in order to find the best deal for your business. Additionally, consider betting a policy with a higher deductible so you'll pay lower monthly premiums.

Administrative

Administrative costs typically include ongoing salary costs such as wages and benefits and office supplies and equipment (computers, tablets, etc.).

• Ongoing salary costs (wages and benefits)
• Office supplies and equipment such as computers, copiers, etc.

Unfortunately, the easiest way to reduce administrative expenses in a business downturn is to cut staff, which is painful for both employees and management but often necessary to ensure sustainability of the business. Sometimes this can be avoided if employees are willing to job share, switch to part-time, or take unpaid leave.

Using contract staff rather than hiring employees is another way to manage your staffing requirements and lower your overhead costs in a fluctuating business environment. Also, consider hiring people for remote work.

Maintenance and Repair

If your business relies on vehicles or specialized equipment, the overhead costs of maintenance and repair can be substantial. Examples include businesses that provide delivery services, landscaping, or equipment rental. Reducing overhead with passenger vehicles, pickup trucks, and vans can be achieved by switching to more fuel-efficient models such as diesels or hybrids. You might also save money by leasing your equipment rather than buying it outright.

Accounting and Bookkeeping

You can reduce your accounting and bookkeeping overhead costs by doing some or all of the business accounting chores yourself using accounting and tax preparation software.

However, keep in mind that doing your accounting yourself can lead to issues if you aren't experienced. You may want to considering using pre-made software tailored to your business. Also, though it might sound counter-intuitive, hiring an accountant who knows how to reduce overhead may save you money through the inefficiencies they find.

Business Overhead Insurance (BOE)

Business overhead insurance policies cover monthly overhead expenses in the event that you become disabled due to illness or injury. BOE plans can cover most overhead expenses including:

• Employee wages and benefits
• Mortgage principal and interest or rental payments
• Utilities
• Property taxes
• Accounting fees
• Business insurance

Business overhead Insurance policies do not cover the cost of hiring temporary replacements. For example, if an electrical contractor becomes disabled, a BOE policy does not cover the cost of hiring another electrician on a temporary basis.

Also, BOE plans are designed to cover temporary periods of disability and as such have maximum payout periods. Personal disability insurance is available for long-term or permanent disability.

Frequently Asked Questions (FAQs)