Your business can be made or broken by how you manage your overhead costs. You may find it challenging to profit if your fixed costs are high. Or you might have to scramble to pay payroll during slow seasons. Low fixed prices make it easier to weather a recession.
What is overhead, and how can you reduce it? Overhead costs are running a business, even if no product is produced. Rent, utilities, salaries, and insurance are all part of your overhead costs. The cost of the raw materials and ingredients used to make your product is separate from the overhead.
Calculating your overhead costs
Understanding your overhead costs is the first step in managing them. Start by reviewing a full year of expenses—total all costs such as rent, taxes, licensing fees, advertising, and equipment repairs. Include the depreciation amount you have claimed on your tax returns if you own a vehicle, building, or equipment. Remember to include extras such as cleaning supplies and printer paper, which are not part of the product.
You can use company records if you are starting a business but need to know your typical overhead costs. You can refine your calculations as you learn more about your insurance, rent, and other fees.
Overhead as a percent of sales
You can then determine if the overhead costs are reasonable. Monthly fees are usually calculated as a percent of monthly sales. However, you can calculate your overhead costs by week or hour. It’s essential to understand how overhead costs relate to revenue.
Overhead ratios can differ significantly by industry. For restaurants, for instance, overheads should be around 35% of sales. Retail overhead ratios are about 20-25%, while professional service firms can have up to 50% overhead costs. Clover insights will help you compare overhead prices with other businesses. Comparative data can be helpful for new companies to see what they can expect and if there are any concerns about overpaying.
You’ll need to find ways to cut fixed costs if your overhead ratio for your industry is too high. Reducing overhead costs is essential when revenues are low in a recession or slow season. You must pay These fixed costs even if your business is not profitable. You’ll benefit if you cut costs ahead of time. Keep your business lean to boost profits, and be prepared for good and bad times.
Here are some tips to help reduce expected overhead costs.
- Rent, can you negotiate your lease? You can arrange a lower rent if your landlord agrees to pay for the repairs. You could reduce your utility costs by fixing drafty windows.
- Colocation – Can your company share a space? Some restaurants, for example, rent out their kitchens during off-hours to catering companies. A retailer could host a temporary ice cream shop in summer to attract foot traffic.
- Utilities: Go green will help you save money.
- Insurance: You should review your insurance policies annually. You can save money by buying multiple policies from the same provider or installing simple safety measures.
- Marketing – Make sure to stretch your marketing dollars the farthest you can, and take advantage of FREE promotion opportunities. Word-of-mouth marketing is a very effective and inexpensive way to market your business.
- Staffing – Look for ways to cut your staffing costs without cutting the staff. Schedule your team based on busy and slow hours.