Reducing business overheads to improve financial performance
While providing a good service and becoming an established leader in your field are common objectives for many SMEs, it’s fair to say that we’re all driven by a desire to succeed in terms of financial stability and growth too.
A healthy bottom line and increased profitability should always be at the core of your business decisions – and while there are many ways to work towards this, in this post I’m going to focus on reducing business overheads to help you improve your bottom line. Overheads are those costs that the business incurs on an ongoing or regular basis that aren’t directly linked to production or sales – such as rent, rates and utilities.
Whether they vary or are a fixed amount each month, our outgoing financial commitments are often overlooked when identifying ways to improve performance – but many businesses waste unnecessary funds without even realising it.
My top 7 tips for reducing business overheads
Before you make any decisions based on my suggestions below, you need to collate your financial data so that they’re informed.
Ask your book keeper, accountant or financial department/director to provide you with a breakdown of your most recent outgoings, then consider the following ways in which you may be able to minimise your expenditure for immediate or ongoing savings.
- Prioritise & analyse – the most effective cost base reviews are done by assessing spend based on size from largest to smallest – naturally it’s the largest areas of spend that offer the greatest potential savings, so start with those and systematically work your way through – because even though the big ticket items offer the greatest potential benefits, it can often be the smaller discretionary spends that can be easily trimmed.
- IT and communications – swapping servers for cloud services, shopping around for cheaper but effective web-based software rather than complex versions that require extensive support, and installing VoIP or using Skype or Zoom rather than landline packages can all help reduce these essential but often expensive business costs – also check your mobile phone tariffs to see if they’re competitive.
- Negotiate – if you’ve been doing business with another company for a long time but have never reviewed the relationship, now’s the time to start! If you don’t ask, you don’t get – there’s no harm in seeing if your loyalty can be rewarded in some way.
- Staffing costs – are all of your team, however small, working efficiently? Whilst it may be tough to streamline/simplify processes to maximise productivity, it’s well worth considering whether your staffing model is effective and driving maximum value. Try not to be a “generalist”: would a contractor/freelancer be cheaper and add an extra level of expertise and efficiency for some requirements such as finance, HR, admin and marketing? This can also work the other way too – you might be outsourcing work when with growth, employing someone in-house could actually be cheaper.
- Bulk savings – are you spending more than you need to on small batch orders and associated shipping costs? Can you gain a discount for larger orders, or even pool with another business in order to buy in bulk and split the savings?
- Premises – after or alongside staffing costs, this is often your biggest overhead. Compare rents and rates with other alternative options and assess whether you actually need all the space you’re paying for. You can even look into sub-letting excess office/warehouse space if your contract will allow it.
- Rent, don’t buy – this can save you money on essential upgrades, reduce asset costs and give you access to free maintenance and servicing, rather than paying for it from your own pot.
Thorough business planning and keeping an eye on your financials can throw up all kinds of opportunities to make savings – leaving you more money in the bank, or freeing up budgets for other things that can help to push your business forward.
It’s also important to understand why you spend money – sometimes we choose to spend more than is necessary to access quality or reliability – and that’s where it’s important to give full consideration to the impact of making changes.
If you aren’t sure where to start and find assessing your overheads difficult or don’t have the skills within your business, don’t be afraid to take your books to an expert who can offer some impartial advice, such as a freelance financial manager.