Understanding Business Overhead Expenses
When starting a business, it’s important to understand all the expenses you’ll potentially be making. One category of expenses is the business overhead expense, which covers the costs of doing business that doesn’t directly relate to producing your product or service.
Managing and keeping track of your overhead costs is key to making your business successful. Below is a simple guide that will help you learn everything you need to know about business overhead expenses.
What are Business Overhead Expenses?
A business overhead expense is any expense that a business incurs while running its operations, such as rent, utilities, salaries, and inventory costs.
It’s essential to track overhead expenses because they can significantly impact your bottom line. If overhead costs are too high, it can eat into a business’s profits and make it difficult to stay afloat. By carefully managing these expenses, you are able to stay profitable and successful in the long run.
Common Business Overhead Expenses
To maintain operations, businesses need a location to set up shop. This is usually acquired through buying or renting out office space. And depending on the property you choose, it could end up increasing your overhead expenses. So to ensure your business runs smoothly, make sure you always include it on your overhead expense list. And if you want to cut costs, try working from home or renting a smaller office.
Overhead expenses can also include utilities such as electricity, gas, and water. While some overhead expenses, such as rent, are fixed costs, others, like utility bills, can vary depending on the business activity. The higher the business activity, the higher the overhead expenses. This is why it is important for businesses with high overhead expenses to carefully monitor business activity levels to control costs.
Equipment and Supplies
Equipment and supplies are necessary for the operation of your business, even if they’re not directly related to any specific product or service. For example, if you own a restaurant, the pots and pans in your kitchen would be considered an overhead expense. Similarly, the copier in your office would also be an overhead expense.
Staffing is considered a business overhead expense for several reasons: First, businesses need people to function. Second, it can be a significant expenditure for businesses, particularly those that are expanding or growing rapidly. Third, staffing costs are often one of the first expenses to be cut when companies are experiencing financial difficulties. Finally, staffing can be complex and time-consuming, making it difficult for businesses to manage their overhead costs effectively.
Licenses and Permits
Licenses and permits are essential business overhead expenses since they cover the costs of the paperwork and fees required to operate your business legally. Without them, you could be subject to fines or even shut down by government agencies. In addition, customers may be less likely to do business with you if they know you’re operating without the proper permits. As such, it’s important to budget for this essential business expense.
Insurance is considered a business overhead expense because it protects business owners from potential financial losses. For example, if a business owner suffers a fire that damages their store, their insurance policy can help cover the repair costs. Similarly, if a business owner is sued for negligence, their insurance policy can help to cover the cost of legal fees. In both cases, insurance can help to protect business owners from financial ruin.
Marketing and Advertising
Marketing and advertising are necessary to promote and sell a company’s products or services. Without them, potential customers would not be aware of your brand and the products ad services you sell. Marketing and advertising help create brand awareness and loyalty, which are essential if you want your business to thrive in the long term.
5 Ways to Keep Track of Your Business Overhead Expenses
Keep a Spreadsheet
By tracking your business overhead expenses on a spreadsheet, you can clearly see where your money is going. You can use the data to make informed decisions regarding cost-cutting or increasing revenue. While it may take some time to set up and maintain, a spreadsheet can be invaluable for controlling your business overhead expenses.
Use an App
Alternatively, there are several apps available that can help you track your business overhead expenses. These apps allow you to input information about your business expenses, such as the amount, date, and vendor. The data will then be stored in a central location, making it easy to track your costs and see where your money is going. In addition, many apps offer features that allow you to set spending limits, track spending patterns, and generate reports.
Have a Separate Bank Account
Many business owners choose to open a separate bank account for business overhead expense purposes. According to some, it helps them track their overhead costs more efficiently and ensures they’re not inadvertently spending personal funds on business expenses. Additionally, it can help to keep business and personal finances separate, which can be helpful come tax time.
Set Up and Stick to a Budget
Having a budget can help you monitor your business overhead costs by giving you a clear picture of where your money is going. This enables you to identify areas where you may be spending too much or where you can cut back. For example, if you notice that you are spending a lot on office supplies, you may want to consider buying in bulk or shopping around for better deals. This will help you to save money and keep your business running smoothly.
Find Ways to Cut Costs
Finding ways to cut costs can help you reduce your business overhead expenses. For example, you might negotiate a lower rent price with your landlord or switch to a cheaper insurance provider. As mentioned above, you can also minimize expenses by buying office supplies in bulk. Or you can explore new ways to reduce your energy consumption. By finding ways to reduce costs, you can keep track of your business overhead expenses more efficiently, save money, and run a more profitable business.
Tips to Keep Business Overhead Expenses Low
Rent Office Space Instead of Leasing or Buying
When you rent an office space, you only pay for the space you use— no need to worry about maintenance, repairs, or property taxes. And since you’re not tied to a long-term lease, you can easily adjust the size of your office as your business grows or downsize if necessary. So if you’re looking for ways to lower overhead costs, renting office space is a smart solution.
Negotiate With Vendors for Discounts
Another way to reduce overhead costs is by negotiating with vendors for discounts. You may be surprised at how much money you can save by asking for a lower price. Vendors are often willing to give discounts, especially if you are a loyal customer or buying bulk items. When negotiating, be sure to be polite and businesslike. It is also a good idea to have a target price in mind to know when to stop bargaining.
Hire a Virtual Assistant
Virtual assistants can handle various tasks, from customer service and data entry to appointment scheduling and social media management. As a result, you can free up your time to focus on revenue-generating activities, and you won’t have to pay the overhead costs associated with maintaining their physical office. So if you’re looking to save money on business overhead expenses, hiring a virtual assistant is another great place to start.
Invest in New Technology
By taking advantage of new tools and applications, businesses can improve their efficiency and save money in the long run. For example, cloud-based software can help businesses reduce their reliance on paper documents, saving money on printing and storage costs. Similarly, energy-efficient appliances can help to lower utility bills.
Outsource Administrative Tasks
As with hiring a virtual assistant, outsourcing administrative tasks can free up your time to focus on other aspects of your business. But more importantly, doing so will help lower your business overhead expenses. By outsourcing, you won’t have to worry about benefits and office space anymore. Additionally, you can often get services personalized to your business needs without paying for extra features you don’t need.
Automate Business Processes
Alternatively, you can try automating your invoicing and bookkeeping processes and customer service. Aside from reducing overhead costs, it helps free up your employees’ time so they can focus on other areas of the company. Additionally, automating processes can help businesses to improve their efficiency and accuracy, which can further help to reduce costs.
Mistakes to Avoid When Reducing Business Overhead Expenses
Cutting Back on Necessary Costs
While trimming some fat from your business overhead expense may be possible, cutting too deeply can lead to big problems down the road. For example, if employee salaries are cut too much, morale will suffer, and productivity will decline. In short, while keeping an eye on business overhead expenses is important, cutting back on necessary costs can lead to more problems than it solves.
Reducing Staff Members Without Planning
Many business owners believe laying off staff members is the best way to reduce overhead expenses. However, this isn’t always the case. Rehiring can be more costly since you may need to train new employees, which can cost you a lot. Moreover, reducing staff members can lead to higher stress levels and absenteeism. As a result, the people on your team will more likely seek greener pastures, and you’ll wind up hiring new staff more often.
Canceling Important Subscriptions Without Planning
Unsubscribing from some of your business tools and services is a mistake because it represents a false economy. Yes, the initial savings you’ll enjoy might be significant. But over time, the business overhead expense will increase due to the inefficiency and lost productivity. The business will also become less competitive since it will have access to fewer resources.
Delaying Necessary Repairs or Maintenance
Many entrepreneurs mistakenly believe they can save money by delaying necessary repairs and maintenance. However, the longer you delay these overhead expenses, the higher they’ll become. Additionally, putting off repairs and maintenance can lead to other problems, such as equipment breakdowns, health and safety issues, and customer complaints. Ultimately, it’s always better to deal with problems as soon as they arise. By doing so, you can avoid expensive repairs, costly downtime, and unhappy customers.
Not Asking for Help
Business owners often try to do everything themselves when they want to reduce their overhead expenses. However, this is a huge (not to mention costly) mistake. For one thing, asking for help will allow you to save more time and money. Hiring a professional or outsourcing the task can free up your time and avoid unnecessary costs. Furthermore, asking for help will also lead to better decision-making. With an experienced advisor by your side, you’ll be able to enjoy objective advice and recommendations regarding business overhead expenses.
Know How Business Overhead Expenses Work
An entrepreneur should understand how overhead expenses work to make sound business decisions. Through the guide above, you’ll learn what a business overhead expense is and tips on how to track and reduce it properly.
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