Overhead – A Sneaky Reality!
Running a business costs money. Particularly overhead costs can sneak up before you realize it is out of control. Overhead costs also have a direct influence on determining the profit of the business and can contribute to cash flow problems. The overheads are related to the day-to-day running of a business. It is costs that need to be paid regardless of the production or income. Overhead is different from the cost of sales. The cost of Sales is incurred to produce the goods or services. An example of the cost of sales will be the wood purchased to produce furniture or products bought to be sold again.
Overhead can be a fixed expense such as rent or lease payments or can vary with the level of business activity such as repairs. Just think of what happened during the hard lockdown in March 2021, certain costs were still due and payable although the operations were halted. Businesses usually cut overheads first if the business is encountering a slowdown. But scrutinizing overhead does not need to wait until the business slows down.
First, calculate how much your overheads are costing you. Compute the total overheads and sales for a specified period. Then divide the overhead by the sales multiplied by 100. If the overhead percentage is too high, it must be reduced to impact profit and cash flow. A low percentage is good, but too low indicated that quality is sacrificed for affordability.
Electricity cost is escalating at an astronomical rate. Investing in solar has not only cost benefits but also tax benefits. Salaries and wages are usually the biggest overhead expense. Analyse each position in the business and ask how the position directly affects the revenue and profit. Is it possible for positions to use team members in other areas like marketing and sales or to outsource positions? Follow the due process to cut any unnecessary positions. Investigate the possibility to outsource expensive positions.
Install a plan to increase productivity and efficiency. Even creating a structure for communication, laying out what each channel is used for, cutting down on empty communication, and do not have meetings to discuss documents that can be read, can be a powerful ways to reduce costs. It is so easy to quickly subscribe to a new app or a software product that will make life easier or more comfortable. When last did you take inventory of the subscription fees and then scrutinize the cost vs benefit and need for the product?
Marketing is essential in any business, but the costs can creep up. Do you know what the cost of the marketing function is? Do you really need to outsource the social media marketing, or can a team member be trained to do the marketing in-house? Your customers can become brand ambassadors if you offer discounts, incentives, or bonuses for referrals.
Do you need the office space you are paying for?
Can a new lease agreement be negotiated or if you own the property rent space out?
Can the business follow the work-from-home trend?
If you have been in a business for a while, evaluate all the contracts. Cancel any contracts that no longer serve your needs and renegotiate the terms of the necessary contracts.
Scrutinize credit card expenses, by asking if the expense is a spend or an investment or whether the expense is necessary to serve customers and to make a profit. Make use of benefits like Ucounts or eBucks. A small cost to analyse is bank costs including card machine fees. Some banks are charging R4.00 per
transaction while others charge a fee of only 80 cents. These can have a substantial effect if the business is doing a lot of card transactions.
Develop the habit of doing an overhead audit every six months This will result in having more cash in the bank, more profit, and get a culture of disciplined investing rather than wasteful spending. You will have peace of mind that overhead costs will not become a sneaky reality.
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