Asking hard questions can be the first step to cutting overhead costs.
The electric company does not care about the current state of your profit and loss statement. When a bill is due, you owe the charge whether your business checking account is empty or full. Such is the reality of being a business owner and dealing with nagging overhead costs.
Of course, the fact that most overhead costs (utilities, rent, payroll and insurance) are somewhat fixed makes it easy to plan ahead. But they are unlike expenses that factor into "cost of goods sold" (advertising, commissions and job materials) because they either pay for themselves or only represent a fraction of the goods sold. Overhead expenses rarely pay for themselves, and they remain a constant – and sometimes a constant nuisance, especially when business is snail-paced and money is tight.
Fortunately, overhead costs are not completely beyond your control. With a little finagling, you can reduce many of the fixed costs that threaten to tighten your profit margin. Even pinching a few dollars here and there can add up to measurable monthly, quarterly and annual cost savings. The key is to sift through your expenses and determine which ones you can eliminate or lower before ultimately devising a plan to eat this money-hungry elephant one bite at a time.
Trimming the fat from your P&L
Overhead is unavoidable, but not all overhead is useful. After a banner year of business, it's natural to adopt dangerous levels of overhead that feel fine until the going gets tough. You might opt for a bigger office space, a few more employees, some software that's nice but hardly necessary, etc. Or perhaps you keep leasing trendy (and pricey) equipment that you don't truly need. Those expenses might seem inconsequential on a monthly basis, but they add up over time.
Obviously, fancy technology and a massive office space are things that might be expendable. However, you cannot adopt a slash-and-burn approach to getting rid of all excess overhead when you see it. After all, some overhead reduction can turn into a PR nightmare.
Consider what would happen if you discovered your overhead costs included full-time employees you may or may not need. Sure, you could institute widespread layoffs to significantly alter your costs. But those layoffs could cripple workplace morale, hurt your corporate reputation, and leave you feeling like a bad CEO for affecting people's livelihoods. I've been there once, and I pray I never have to make a decision like that again.
Hopefully, you are not in that position. If you are, I encourage you to check out other effective ways to reduce static business costs before you announce layoffs. Rifle through your books to see whether you can make any of the following adjustments to gain control of ballooning overhead.
1. Outsource certain responsibilities.
Instead of hiring new employees for certain tasks, consider outsourcing those duties. Headcount costs can turn into flexible cost-of-goods expenses if you outsource certain projects, roles or to-do items. When you need to pull back on your overhead, you can merely cut back on third-party services. It is much simpler to bring tasks back inside the company than to constantly hire and fire talented folks.
The only caveat to outsourcing is that freelancers may be less likely to care about your business the way an employee might. After all, they are less invested in the long-term success of the brand. For this reason, limit your third-party vendor contracts to industries and tasks that are well-suited to outsourcing, such as bookkeeping, tax preparation, accounting and some marketing – basically any specific trade skills that don't require passion to do well.
2. Ask hard questions.
Every so often, force yourself to dive into your profit and loss statement. See any recurring expenses that could be unnecessary? Often, we miss opportunities to make adjustments that can increase the bottom line.
A great example is being able to predict the cost of customer acquisition per advertising channel. Nourish those avenues that provide positive returns, and eliminate any that do not. By manipulating marketing metrics to perform more favorably, you can avoid dangerous and somewhat "invisible" budget drains.
3. Incentivize workers.
There is nothing wrong with expecting employees to provide maximum output. However, you will need to give them the incentive to wear many hats. Do not expect a competitive salary alone to motivate hard workers – 66% of workers say they prefer noncash incentives, according to a survey from the Incentive Marketing Association. I remember one of our best employees simultaneously getting a $10,000 raise but being told he could no longer wear flip-flops to work. The money was nice, but his morale went through the floor.
Granted, most small and midsize businesses don't have the ability to offer lofty incentives or stock to team members. Instead, find creative ways to go above and beyond. For instance, motivate employees by giving them the autonomy to work how they want so that they own the fruits of their labor. This could be in the form of occasional remote work or, if possible, the option of owning stock or membership units (depending upon how your business is set up). Of course, you will want to vest ownership over four years to reduce job-jumping – which will lower overhead even more due to the lessened need for recruitment and onboarding.
4. Turn off the lights.
There's no need to work in total darkness, but you should make use of products such as occupancy sensors and efficient LED lighting. As long as you plan to remain in your small or midsize business at least a year, you will see a positive return on investment in utility savings. Just turning off your computers before everyone heads home for the night can lead to a savings of more than $200 per year, depending on the size of your operation.
You might also consider replacing your lighting with cost-efficient LED bulbs, which will often pay for themselves in a year or two. Another way to reduce energy use is to set up shop in a space overflowing with natural light. Sunlight can reduce the need for artificial lighting during the day, and it can boost the attitudes and wellness of team members.
You will never be able to reduce your overhead costs to zero, but that is no reason not to get them to a manageable number. Be realistic, make smart adjustments, and then track your changes to see how they affect profit margins. You might just get an early holiday present in the form of more savings to put back into your company.