Overhead expenses are costs not related to labor, direct materials, or production. They represent more static costs and pertain to general business functions, such as paying accounting personnel and facility costs. These costs are generally ongoing regardless of whether a business makes any revenue. If you don’t have a plan for managing overhead costs, they can quietly drain your profits.
Overhead expenses aren’t directly related to making a sale but are still necessary for your business — like insurance, marketing, rent, taxes and administrative expenses. Watch out for these common costs that can get small businesses in trouble.
High Overhead Sales
Not every sale is equal when it comes to overhead costs. Returning customers are more cost-effective because they are already familiar with your business. Since you have the client’s information in your system, you can typically close these sales more quickly and won’t need to negotiate a contract from the start. Bringing on a new customer costs five to 25 times more than retaining an existing one, according to the Harvard Business Review. If you are looking for new clients, targeting referrals can be a cost-effective strategy — especially compared to more expensive sales/marketing techniques like cold calls, direct mail and ads. Focus your business on these low overhead sales whenever possible.
Handling Too Much In-House
You don’t have to handle all of your work in-house. The internet has made it easy to outsource administrative work, web development and marketing to contractors. Not only can you pass these jobs onto specialists, you’re also able to avoid the extra expenses of hiring more employees. With contractors, you don’t provide benefits or cover part of their payroll taxes.
Additionally, you can benefit from the flexibility of only having to pay contractors when you need their services, since they don’t receive a fixed salary. Your employees can focus on key business tasks like finding customers and handling projects while this extra work is handled by contractors.
Payroll and Bookkeeping
Payroll and bookkeeping can be time-consuming and expensive. While handling everything yourself is possible, it takes up a lot of time. There’s the potential to save money by doing it yourself, but you could also make costly mistakes– like being fined for miscalculating your tax withholding. On the other hand, hiring an accountant is an expensive overhead cost, as well.
Payroll and bookkeeping software has come a long way in automating this manual process — but be mindful that there may be some times that you should consider working with an experienced accountant. These professionals can help you ensure that as your business grows, you’ll still be compliant.
Autopilot Cost Increases
Overhead costs gradually increase over time, especially if you aren’t paying attention. You should review your costs at least once a year to see what’s increased, if there are any unnecessary (or new) expenses and whether you can get a better deal by making a switch.
Did your insurance premiums go up? Are you renting storage space that you no longer use? Can you lower your insurance rates by switching carriers? Could you save on rent by moving to a new office?
Asking these tough questions during your annual review will help keep your overhead expenses from spiraling out of control.
When you hire salaried employees, they’re earning the same amount each week regardless of their performance. If employees aren’t happy with their work environment, they might be distracted and take more sick days, which hurts the return on your investment. Even worse, you could run into issues like high turnover, which increases your overhead costs as you spend time and money to hire new employees. Focus on creating a positive work environment and listen to employee concerns to keep them happy and engaged.
Don’t let overhead expenses chip away at your hard-earned profits. By managing overhead costs with these strategies, you can improve your bottom line. The original version of this blog can be read on our provider, Westfield Insurance’s website.