If your monthly expenses are standing in the way of your profitability, it may be time to take a close look at any wasteful or inessential expenditures that can be eliminated—i.e. it’s time to start reducing overhead.
When we refer to overhead expenses, we don’t just mean keeping the lights on. Overhead expenses are defined as any expenditures not directly related to the creation or distribution of your product/service. Reducing overhead costs can make a world of difference for your bottom line, and if you take an honest inventory of your monthly payment, you may find that your liabilities can easily be cut by 5 to 10 percent. Over the course of a year, that simple gesture might result in thousands or even millions of dollars’ worth of savings.
1. Outsource Your Accounting Services
A full-time accountant or CPA may cost your company between $45,000 and $125,000 per year. While some businesses do require a dedicated full-time financial expert, most businesses—especially small to medium-sized companies—can achieve the same benefits at a fraction of the cost by outsourcing their accounting to a respected third-party firm.
In most cases, outsourced accounting & bookkeeping services cost less than half of what you’d pay for one in-house team member. In some cases, the savings are significantly higher as you’re able to outsource work that would ordinarily require multiple team members—such as a bookkeeper, an accountant, and an office manager.
2. Identify Areas of Waste
Conduct a thorough audit of your recent expense reports, and consider the following questions:
Are there any day-to-day business expenses that you can cut entirely? For example, you might eliminate costly software licenses that you never use or replace them with open-source alternatives.
Are there any business expenses that can potentially be reduced? For instance, it’s possible to reduce even the most essential expenditures by shopping around for new vendors or renegotiating contracts. Even property leases can be renegotiated.
Are there projects that you can scale back? Determine which projects or investments are yielding the greatest return and consider cutting back on those that are less valuable.
Are discretionary expenses (e.g. meals, first-class travel, office remodeling) impacting your bottom line? Certain luxuries are best reserved for those times when surplus spending is within reach.
Are the employee benefits actually serving their intended purpose? While a benefit like paid time off will keep you competitive and promote positive morale, you might not want to keep investing $2,000 a month in employee gym memberships if your employees aren’t actually using them.
Determine which expenses are essential, which ones can be cut back, and which ones can be eliminated or set aside for later. Then adjust your overhead spending accordingly.
3. Consolidate Expenses
Reducing overhead costs is one thing, but consolidating can also be valuable. There are numerous ways to do this. For example, rather than purchasing separate business software for CRM, email marketing, and project management, you might opt for a software suite that offers all of these solutions at a lower cost.
Consolidation may be especially valuable when it comes to assigning and segmenting job roles. In the average industry, you want to keep your payroll costs to between 15 and 30 percent of gross revenue. Again, though, this does vary by industry; service-based businesses with low inventory costs can sometimes invest 50 percent or more in labor without hindering profitability.
So if your gross revenue is $150,000, and you’re spending $85,000 on labor, you’re probably overspending on personnel. Rather than eliminating essential functions, you can establish hybrid job roles and invest in training up your existing team for new skills.
Take some time to examine your payroll reports, and research the average payroll percentages in your industry. If you’re on the high side, now is the perfect time to restructure your team. Rather than hiring both an accountant and a CFO, you might look for an accounting firm that offers CFO services. If you’re looking for a part-time data entry professional, you may be able to assign some of the work to an existing receptionist. IT jobs can sometimes be combined with web development (if you find someone with the right skill set). Communications professionals often excel in specific areas of marketing, sales, or content creation.
So instead of hiring for new jobs that may not warrant 40 hours a week, look for existing opportunities within your team. Sometimes it’s as simple as removing job listings and hunkering down with your employees. However, if your payroll costs are causing your business to hemorrhage money, you may need to make the difficult decision to lay off some of the less essential team members. Determine which roles make the most sense to eliminate or consolidate, and restructure accordingly.
The Answers Are All in Your Accounting Reports
No two businesses require the same solutions when it comes to reducing overhead costs. That’s why it’s important to assess your expense reports, payroll reports, inventory reports, and other financial data. The best way to determine your weaknesses, oversights, and opportunities is to have a knowledgeable CPA examine your data and provide customized recommendations.
Still, if you look closely at your spending, you should see some immediate opportunities for improvement. Even small steps, like investing in more cost-effective business software or slowing down on inessential new hires, can make a big impact over time. Every dollar saved in overhead costs is an extra dollar of profit.