Controlling overhead costs is crucial for maximising profitability and maintaining a healthy cash flow.
As a business experiences growth, it is extremely easy for the business expenses to increase significantly. In this article, we explore actionable ideas to enhance overhead control, boost profits, and optimise cash flow, enabling businesses to thrive.
Overhead costs refer to ongoing business expenses that are not directly linked to creating a product or service. These expenses are essential for the day-to-day operation of a business and can include rent, utilities, insurance, administrative salaries, marketing expenses, and more. Unlike direct costs that vary with production levels, overhead costs tend to remain relatively constant.
Analyse and Identify: Conduct a thorough analysis of all overhead costs, categorising them as fixed (e.g., rent, insurance) or variable (e.g., marketing, utilities), to identify areas for potential cost savings.
Have a clear expense budget & assign responsibilities Ensure you start the year with a clear overhead budget line by line, that is set in detail and by taking a ‘zero-based’ budgeting approach. Each line on the expense budget should be assigned to a key staff member as responsible for that budget and ensuring it stays on track.
Monthly Budget Tracking & Accountability It is imperative that every business has timely monthly management reports that show the actual expenses vs the budget expenses for the month and highlight any positive/negative variances. We also believe it is then essential to follow that through with a monthly non-negotiable recurring meeting with all key personnel and budget holders to be present, to review these expenses and for relevant people to be accountable for the budgets they are responsible for.
Negotiate with Suppliers: Reviewing and renegotiating contracts with suppliers is another opportunity for overhead control. Reach out to your suppliers to discuss pricing, terms, and discounts. Regularly assess market conditions to ensure you are getting the best value for your money and explore alternative suppliers to find better deals.
Embrace Energy Efficiency: Implement energy-saving initiatives, including investing in energy-efficient equipment, optimising lighting systems, and promoting energy-conscious behaviours among employees.
Focus on Employee Productivity: Employee-related expenses form a significant portion of overhead costs. Enhancing employee productivity can lead to improved profitability and cost control. Provide appropriate training and professional development opportunities to enhance skills and knowledge. Additionally, consider implementing performance-based incentives and reward systems to motivate employees to achieve higher levels of productivity.
Utilise Technology Solutions: Identify areas for automation and adopt software solutions and cloud-based systems in accounting, payroll, customer relationship management, and supply chain management to streamline processes and reduce costs.
Controlling overhead costs is a continuous effort that requires proactive management, relentless accountability and a commitment to optimising efficiency. By implementing the above strategies, businesses can control and reduce overhead costs, paving the way for improved profitability and cash flow.
Need to talk to an expert?
If you would like more information on how we can help you and your business, please contact us at marketing@oldfieldadvisory.com or call 02476673160.
Please note: This article is provided for information only and was correct as at time of writing (04/10/23). Any lists and details provided above are not exhaustive and are not intended to be full and complete guidance. No action should be taken without consulting detailed legislation or seeking independent professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this article can be accepted.
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