Every businessperson wants a successful business but to have that, one essential requirement is that costs must be kept to a minimum. One of the best ways of doing this is reducing business overhead costs and so in this article, we are going to tell you 8 highly effective techniques for reducing business overhead costs.
Business Overhead Expenses
Before we go into these expense management methods, let us first see what overhead costs are-
Business overhead expenses are costs which reflect the continuing expenses of running a business. Although these costs cannot be directly linked to creating a product or service, they are vital for the continued functioning of the business. Different businesses have different kinds of overhead costs.
Some Examples of these are-
- Rent for space
- Utilities like electricity
- Insurance of the factory
- Office supplies and equipment
- Salaries that aren’t directly linked to production
These costs might be fixed, variable or semi-variable.
Monitoring overhead costs are very important because although they are not directly related to revenue, they can really drain a business of its profits.
Let us now see the 8 business expense management solutions which will help your business shine and make you a lot of money-
1 Analysis of Overhead Costs
Determining the origin point of the business cost is the first step in controlling it. The best way to do this is to conduct an overhead cost analysis. Such an analysis breaks all costs into well-defined categories and analyzes the trends in them. For example, an analysis might show that the company’s electricity bills are highest during the winter, perhaps because of excessive use of the heating system. Thus the business owner can prepare a plan to reduce the wintertime energy costs.
2 Reduce overheads by outsourcing IT
Outsourcing IT is a good idea for any business. Keeping the support system or back office that caters to your supervising staff or accounting in-house usually adds a lot of burden to your business’s finances as it becomes necessary to maintain a network of computers and other peripherals for this task.
Changes in telecommunications have made it possible to not only outsource your IT systems through data warehousing and management but also make doing this profitable.
3 A well-planned expense management system of accounts
There are many proven accounting methods which can help you reduce overhead costs.
Some of them are-
- Cost Centre Accounting: Cost center accounting is based on knowing profit centers i.e those business sectors which generate revenue and cost centers or those which generate costs. This method of accounting lets a business owner know about overhead costs in detail and understand which areas of the business are creating costs. This knowledge will help the owner to control the costs of running the business thus letting them know the profitability of separate departments in their business and they can use this data to make necessary decisions.
- Cost Element Accounting: In Cost Element Accounting, costs that occur in a specific department where cost flow happens are recorded and several “cost elements” are identified. The cost elements are of two types, primary and secondary. Primary cost elements include the cost of fuel, electricity, raw materials and employee salaries. Secondary cost elements include costs of assessments, allocation of internal activities, and settling orders. The various elements can be examined separately or analyzed after bundling into categories.
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4 Activity Based Costing
If you are in the manufacturing sector, then activity-based costing will definitely suit you. This method analyzes the different methods that a firm follows to produce a product and gives or assigns indirect costs to those products.
To do this precisely, it uses the relationships between costs, activities, and products. One drawback to this method is that some costs like employee salaries cannot be pinpointed to a specific product.
5 Reducing procurement costs by narrowing supplier base and creating negotiated contracts
The markets have gone through difficult phases and so the best time to build a better relationship with your suppliers is now.
What you should do is develop and nurture relationships with suppliers so that they provide you with a discount in exchange for you becoming a long-term and valued customer for them.
This will help reduce overheads of several items. One thing you can do is get a discount from a hotel chain by always using it for your employees. Such small and mid-sized changes will help you be more profitable in the long run.
6 Have Multipurpose Employees
Doing more with less is a maxim that will always stand true if you want profitability. Having employees who can serve more than just one function increases productivity. This it is especially beneficial for some businesses like construction and startups.
For example, in construction, you can eliminate downtime and put employee hours to good news in some other facet of the business while you are waiting for something else to complete.
7 Have a More Disciplined Approach to Planning and forecasting
This is one of the key areas in business where you can save on a lot of overhead expenses. Having a disciplined planning process makes financial processes more efficient and also helps communicate future cost and risk controls to creditors so that you will get loans more easily.
8 Spend Money to Make Money
You know that you should be prepared to spend money to make money but this statement even applies to save money! Important employees need to be kept happy so that productivity and efficiency are high as this will help you save on expenses.
Long-term compensation, benefits and retention programs will make your employees stay with you even during tough times. Spend wisely so that you will be well prepared for the future! These were our 8 most effective expense management technique for reducing business overheads. We hope you enjoyed reading the article and we wish you a good day.