Picture this: Your business starts taking off, making more and more sales each month. But your profits never seem to increase, since every time production scales, you find yourself with more overhead costs.
From sky-high utility bills to software subscriptions you don’t really need, these expenses can stack up fast. Cutting down on overhead is crucial for keeping your business profitable and setting it up for long-term success.
In this article, we’ll share some practical strategies to help you learn how to reduce overhead costs. Jump to the bottom to discover how Fishbowl can streamline your operations and give your bottom line the boost it needs.
The importance of reducing overhead costs
Overhead costs are the expenses that keep your business running but aren’t directly tied to production. These include expenses like rent, utilities, office supplies, and salaries for non-production staff. Indirect costs are necessary, but they eat into your profits if you don’t manage them carefully.
Reducing overhead is key to maintaining healthy cash flow and staying competitive. Plus, cutting unnecessary expenses helps you reinvest in growth areas like equipment, labor, and/or new production lines to maximize profitability.
Fixed vs. variable overhead costs: What are they?
Fixed overhead costs stay the same no matter how much you produce — in other words, they don’t fluctuate based on production levels. For example, you probably pay the same amount every month to rent an office space and the cost of your workers’ comp insurance plan might be stable year-to-year.
Variable costs change depending on how much you produce. These costs rise as production increases and drop when production slows. Examples include wages for hourly workers, utility bills that fluctuate with the amount of energy used in production, and equipment maintenance costs.
Main types of overhead costs
Overhead expenses can be divided into three main categories: manufacturing, administrative, and sales. Each category covers different aspects of your business operations and has its own set of expenses.
Manufacturing
Expenses that are directly tied to manufacturing goods — like the costs of raw materials and labor — are known as manufacturing costs or operating expenses. In contrast, manufacturing overhead costs are those that aren’t directly tied to the production process or products themselves. Some examples include:
- The rent or mortgage you pay for your factory or warehouse
- Utilities like water for employee restrooms and electricity to maintain temperature control
- The cost of your security systems
- Wages for non-production staff like janitors
Administrative
Administrative overhead refers to costs related to the management and day-to-day operations of your business. These costs are crucial for maintaining the structure of a company but don’t directly contribute to production, including:
- Salaries for executives and HR staff
- Legal fees and insurance costs
- Office supplies
- The cost of software and utilities like internet
Sales
Sales overhead costs are the expenses you incur to promote, sell, and distribute your products. These costs are directly linked to growing your business and driving revenue. Examples include:
- Marketing expenses (like the costs of advertisements and online campaigns)
- Sales staff salaries and commissions
- The cost of customer relationship management (CRM) software
- Storage and distribution costs (such as carrying costs and shipping and handling fees)
7 methods to reduce overhead costs
Reducing overhead costs frees up needed capital and boosts profitability. Here are seven strategies to cut costs:
1. Manage your contracts
Reviewing and renegotiating contracts regularly is one of the best ways to reduce overhead. It helps you avoid overpaying and ensures you’re not locked into unfavorable agreements, whether you’re contracting with landlords, service providers, or suppliers. When your contracts expire, shop around for better deals and consolidate services wherever possible. If you’ve been a long-term customer, ask for a discount upon renewal.
2. Be proactive, not reactive
Taking a proactive approach to cost management means identifying potential problems before they escalate. Monitor expenses carefully, set up budget tracking systems, and watch for worrisome spending trends so you can address them as soon as possible.
Also, take a proactive approach to maintaining equipment. When tools and machines break down unexpectedly, you’re not only paying repair costs but for the downtime and missed opportunities. Implementing regular maintenance, scheduling inspections, and replacing worn-out parts before they fail saves money in the long run.
3. Clean house and remove waste
Look for inefficiencies in each aspect of your operations and regularly get rid of waste. Whether it’s excess inventory, outdated equipment, or unnecessary subscriptions, cleaning house helps eliminate costs that don’t add value. Optimize your processes to streamline workflows and focus on maximizing the use of existing resources. The goal is to work leaner — not harder — and reduce any excess that’s draining your profits.
4. Embrace technology
Investing in technology to automate repetitive tasks can greatly reduce your overhead costs, freeing up time and resources for more important activities while reducing errors and inefficiencies. From inventory management software like Fishbowl to time-tracking apps/solutions (such as Fishbowl Time), the right technology streamlines operations.
5. Cut back on energy consumption
Energy costs can quickly add up, especially in a manufacturing business. Lower your energy bills by making small changes like switching to energy-efficient lighting, upgrading insulation, or using programmable thermostats.
Encourage employees to be mindful of energy use by turning off lights and equipment when not in use to reduce costs further. These simple steps lead to long-term savings without sacrificing productivity.
6. Outsource when possible
Outsourcing non-core functions like accounting, HR, or IT support can save you the expense of hiring full-time employees. Specialized providers often deliver better service at a lower cost, and outsourcing helps you focus your resources on what you do best.
7. Cross-train employees
Cross-training your staff helps you maximize your workforce without hiring additional employees. By training employees to handle multiple roles, you ensure they can complete complex tasks efficiently, even during peak times or employee absences.
This flexibility reduces the need for overtime or temporary hires, shrinking labor overhead. Plus, employees feel more engaged when they have a broader skill set, leading to higher morale and job satisfaction.
Discover how Fishbowl can help your business minimize costs
Cutting overhead costs is crucial for maintaining a healthy bottom line, and Fishbowl’s comprehensive inventory management solutions help you do just that.
With seamless QuickBooks integration, Fishbowl optimizes inventory control, automates workflows, and provides insights into your costs. As a result, you enjoy streamlined operations, reduced waste, and lower overhead expenses.
Ready to take your business to the next level? Schedule a demo today and discover how Fishbowl can boost your bottom line.