Improving profit by controlling overheads

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Business gurus will tell you that there are 5 or 6 – or maybe even 8 – ways to increase your profits. Whatever the number, all but one of them deal with increasing sales. The last one is always “reducing overheads”.

First, a quick recap on the accounting terminology. Business costs can be divided into two categories:

Variable costs 

Sometimes referred to as cost of sales or cost of goods sold. These costs vary in line with the level of sales. For example, if you sell goods, you’ll need to buy more of them if you want to sell more. Likewise, if you sell online, your postage costs will rise in line with the increase in sales.

Fixed costs – or overheads. 

You are stuck with these costs whether you sell a lot or a little – or nothing at all. Rent and rates of business premises is an excellent example of a fixed cost.

There is also a third category, effectively a sub-division of overheads, which we might call “discretionary costs”. These would include entertaining expenses, directors’ bonuses, non-essential gadgets and vanity expenditure on executive offices, cars and perks. So if costs need to be cut, have a hard look at this third category – better still, have someone from outside your business have a dispassionate look at them!

Here’s a short list to help you get your overheads under control

1. Trim excess staff

Especially support and admin staff. Do you really need them all?

Think about if it would be cheaper to outsource rather than employ a full-time member of staff.

Many of our clients outsource the help of the accounts and bookkeeping team to do the books only when contracted to, which saves those we work with time, effort and stress about having an extra workforce.

Here’s how a dedicated financial controller can help.

2. Don’t be afraid to fire people

The correct way, of course.

You don’t do them or yourself any favours trying to keep a round peg in a square hole (or keeping any peg for whom there’s no hole at all!).

3. Look at your pay structure

If you pay bonuses or overtime, make sure you’re getting value in return.

That they are truly earned and not effectively part of base pay.

The same applies to benefits in kind such as company cars.

4. Consider leasing or renting instead of owning assets

There’s no great virtue in owning a depreciating asset, and leasing will be easier in terms of cash flow.

5. Look at your office costs

Property costs are likely to be one of your most significant overheads.

If you don’t need workshop or manufacturing space, could you work remotely or relocate to a shared work hub? If not, at least minimise wasted space.

For example, look at going completely paperless and reducing the need for filing and document storage space.

6. Shop around and negotiate prices

You do this with personal expenditure, apply the same rules at work. And do it regularly.

Consider contacting long term suppliers. Going into multi-year contracts has more benefits than just lowering your expenditures.

7. Put significant expenditure out to tender

Get at least three competitive quotes. You might not want to pick the cheapest, but you’ll keep your suppliers on their toes.

8. Don’t hold excess stock

If goods aren’t selling, know when it’s time to cut your losses and clear them out.

See if suppliers will give you extended credit or sale or return terms, which avoid tying up your capital.

9. Don’t upgrade automatically

Often, you don’t need the latest product or software upgrades. Try upgrading every other year instead of annually.

10. Keep overheads under review

At least quarterly. Sit down with your managers and finance team and look at everything you’re spending.

Ask questions, challenge them – are they essential? Do you need to repeat that expense in future? Could you get it cheaper from a different supplier? Have you asked the supplier for a discount?

Could we get the exact product/service in a more affordable way  – e.g. Outsource, rent instead of buy.

Found this information useful?

If you found any of these points useful, we have a growing library of related information on how to improve your business in all sorts of ways.

We support small and not so small businesses to achieve their financial goals, predictable revenue and help shift the mindset of business owners to a leadership role.

Click the link to learn about our Business Improvement Package.

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