To make money in any business, it is important to spend money. But every business has a breakeven point when the spending is equal to the income.
Post that point, the spending outweighs the income, and it is hard to make profits. When spending outweighs the income, it becomes difficult for the business to survive.
Many businesses are not able to cut their costs and hence go bankrupt. Ultimately the businesses have to borrow loans to finance their basic needs and survive in the market.
Working on your cost reduction may seem to be a hectic task. But once you manage to cut down on your costs, you will see a major increase in your profits over time. When the profits start increasing, the business will automatically see growth.
Reduce the cost and increase your profits
A business that is always incurring losses becomes unsustainable after some time. To sustain your business, you can take measures to cut down on your expenses.
Another way to reduce your expenses is to cut down on your overhead costs, which will lead to an increase in your profits.
Taking such measures will help your business persist through monetary downturns sufficiently. Some businesses may plan to avail loans to adapt measures and cut down their expenses.
They can opt for loans such as business loans, loans for the self employed etc. Once these loans are approved, the corporation can produce and develop.
Overhead Costs vs Operating Expenses
According to some people, overhead costs and operating expenses are the same. This is not true as these two terms are different in their way.
Operating expenses or commonly known as direct costs, are the expenses that are required for daily operations and are an essential expense for the business. These expenses are incurred on the activities such as marketing and promotions, selling and production-related activities.
Labor, materials, manufacturing, and packaging-related activities are also included in the operating costs.
On the other hand, overhead costs also include business-related expenses but the costs that have to be incurred irrespective of any production or sale by the business. Examples of overhead costs include salaries, rents, accounting expenses etc.
Types of Overhead Costs
Fixed Overhead cost
Fixed overhead costs remain the same irrespective of the profit or any business activity. Common fixed overhead costs include rents, bills, loan payments, government fees etc.
Even if the business is not producing and selling anything, these costs have to be catered to. In case of no revenue generation, the costs still remain the same.
As the name says variable, these costs transform depending on the deal’s volume. Variable costs are directly proportional to sales. They go up with your sales and come down with your sales.
Common variable costs include office supplies, legal costs, equipment maintenance costs etc.
Semi-variable costs have to be paid, but as the name includes semi, so the amount changes according to activities carried out by the business. Some of the semi-variable costs include vehicle costs, sales-related salaries and commissions etc.
Following are a few ways to reduce your overhead costs to increase your profits:
Hire an Accountant
An accountant may seem unnecessary, but hiring a professional to supervise your finances is necessary. An expert can help you cut down your costs effectively by providing professional tips.
Along with the cost-cutting techniques, your accountant can also help you with the right tax deductions.
More cost-Effective work Space
Your office space contributes a major chunk to your expenses and overhead costs. You can re-evaluate your decision and look for a new location that addresses your business needs but with a lesser cost.
You can save a part of your expenses by shifting to a new cost-effective office space. You can try out the following ways:
- Decluttering your office and moving to a rented space
- Switching locations without affecting the productivity
- Offer work from home option to a few of your employees
Rent Instead of Buy
Having your own business equipment is a huge expense. Rather than buying your business equipment, you can evaluate the option of leasing or renting the required equipment.
This approach saves other costs such as maintenance and mending costs of the equipment.
Downsize your Team
Employee salaries form a big part of your expenses. You can think of decreasing your staff, and it has to be strategically so that it accomplishes not affect the sales and productivity of your business.
Another way is to hire smarty in the starting, i.e. hiring people who have multiple skills and belong to different backgrounds. The more skilled people you have, the less you have to spend on their training and development.
The Green approach
If you are not careful with your utilities, they can add up to a really significant share of your costs. One way is to adopt the green approach and save your bills and expenses.
Shifting to eco-friendly utilities and ways such as LED bulbs and recycling methods can decrease utility expenses. Also, you can go for a paperless technique. It may have a dual benefit of reducing your costs and, at the same time contributing to the green approach.
You may consider the option of outsourcing your business tasks. It is not mandatory to do everything under one roof. Outsource a few of your business tasks and see a difference in your expenses.
This also saves costs on other overhead expenses and office supplies. A benefit of outsourcing is that if you want to cut down further expenses, you can stop it anytime you want.
In order to achieve success, a business has to work on reducing its costs and expenses. If an entrepreneur is just focusing on increasing their profits, they may not succeed.
Hence, it is essential to follow a holistic approach for their business growth.