As an entrepreneur, you’ve always got your eye on all the costs a small business must consider. Managing income, accounts payable, invoices, and other expenses can make for a tricky financial balancing act.
Small business overhead costs are one area that impacts most businesses. While some costs are unavoidable, there are things you can do to reduce or streamline some of them.
Because it pays to take a closer look at your overhead, we've come up with tips for controlling your overhead costs.
What are overhead expenses?
Overhead expenses (also called indirect costs) are the general expenses it takes to run a business, not related to the materials involved in creating products or services. Overhead costs are the operating expenses that support your day-to-day operations.
Many of these costs don’t change with the success of your business. For example, the cost of maintaining a delivery vehicle or heating a store is the same whether or not you have customers.
However, if you have to buy more supplies for your cleaning business because business is skyrocketing, those supplies don’t qualify as overhead costs — these are considered direct costs. (They’re all expenses nonetheless.)
Unfortunately, you can't avoid many overhead costs — businesses need things like electricity, internet and office space to operate. The key is to keep track of these costs and not let them get in the way of growing your business and turning a profit.
Example of common small business overhead costs
Overhead costs for small businesses usually fall into two buckets: fixed and variable.
These operating costs don't change even when business activity increases. Fixed costs are usually predictable month to month. They might include:
- Rent or mortgage for an office or commercial space
- Some utilities (e.g., internet, garbage)
- Property taxes
- Business insurance
- Annual salaries
- Government fees and licenses
- Depreciation of assets
Let's say you own a bakery business. If you pay $2,500 a month for renting a retail space, that is a fixed overhead cost. Your rent doesn't change if you sell five or 500 croissants that month.
Variable or semi-variable overhead
These are the costs that may change depending on your activities or production. When you have more business activity, these costs may rise. They include:
- Consulting services (e.g., legal or accounting)
- Some utilities (e.g., electricity, gas or water)
- Office supplies
- Equipment maintenance
- Wages for certain employees (e.g., hiring freelancers, sales commissions or overtime)
With the same bakery business, say you experience a spike of people buying pies for Thanksgiving, going from selling 20 a month to 200. You may hire a helper or pay a worker overtime to accommodate the rush. You’re also probably using more electricity and water with the increase in production. These would be considered variable costs.
How to manage and reduce small business overhead costs
Although many overhead costs are fairly consistent, that doesn’t mean that business owners should just let them continue to operate unchecked. Managing your overhead costs can be critical to keeping your books in the black.
There are several things that you can streamline with some cost-saving tactics.
1. Revise regularly
Don't assume that the overhead plan that worked for your company last month or last year is still the right solution. Check regularly to see where the money is going, what actions can lower costs and if you should reallocate money.
Taking time to manage your cash flow helps you stay informed and in control of your finances. Your business operation needs may change over time, and your expenditures and overhead costs should change subsequently.
2. Plan and reallocate accordingly
Plan ahead to know if certain months or quarters will have higher overhead business costs so you can allocate the money and make sure there are funds available.
For example, if you need to renew your insurance policies one month or place a large order of materials for an upcoming trade show, plan ahead for balanced books and business cost reduction.
3. Don’t pay for more insurance than you need
Many business owners spend too much on insurance premiums or pay for coverage they don’t need. Evaluate your coverage and get quotes to get an idea of where you can cut costs without losing protection.
4. Think outside of the (big) box store
Many business owners consider things like office equipment, ink cartridges, paper, and marketing materials part of the cost of doing business. However, you can often find better deals than the retail price of a large office supply store.
Try negotiating with a vendor for a bulk discount, even if you need to partner with another small business for a cost-effective price. Also, reuse and repurpose as many materials as you can.
5. Re-evaluate the space you need
Depending on what you do, you might need a physical office or commercial space for doing business. Still, a lower monthly rent could dramatically decrease your overhead costs.
Look around — could downsizing to a slightly smaller space, give up a few amenities, or try a new neighborhood for lower monthly rent?
Some business owners even have luck moving to a different suite in the same building or re-negotiating with their landlord for less expensive rent. It's worth checking into your options once a year or so.
6. Consider going green
Going paperless or digital helps you save money on office supplies. It can also boost productivity and help you find information more quickly.
Considering fluctuating gas prices and the growing number of incentives and rebates available, you might look into switching to an electric or hybrid business vehicle. While electric vehicles require a higher upfront cost, they generally have lower fuel and maintenance costs over time.
Even replacing light bulbs with energy-efficient bulbs can save you money in the long run. Every bit helps!
7. Have an accountant help you
While hiring an accountant may seem unnecessary, having a professional may be just what your business needs to keep your costs down. Accountants can help you improve the accuracy of your bookkeeping, avoid financial mistakes and identify ways to cut costs.
8. Outsource some tasks and responsibilities
Labor costs are one of the things that bring up your overhead quickly. Instead of hiring in-house workers, you can outsource certain tasks without bringing on full-time employees. And when you need to scale back, you can stop using these service providers as a cost-cutting measure.
For instance, you don’t have to hire an on-staff accountant or marketer if your business or startup is still small. Outsourcing IT management, shipping and administrative tasks are commonplace for small business owners.
9. Stay lean
Don’t fall into the trap of thinking that you need to spend lots of money to make money. Many of the most successful small businesses follow a lean finance strategy to put as much money as possible into growing a business instead of just running it.
Be vigilant about ways to reduce business expenses by embracing technology, outsourcing projects, relying on unpaid or low-cost marketing and trimming utility costs.
NEXT helps small businesses get coverage without the huge expense
Small business overhead costs shouldn’t keep your company from reaching its goals. Managing your overhead expenses can help put your business on the path to financial success.
NEXT helps small businesses do this by keeping our business insurance costs low. We’re 100% online, and we help thousands of different business types find customized insurance packages with no extra fees.
Start our free instant quote online to review your options, purchase coverage and get your certificate of insurance if you need one. The entire process takes less than 10 minutes.