10 considerations before opening a cafe
Overhead costs are inevitable when it comes to running a small business but that doesn’t mean you can’t keep them to a minimum. In this article, we cover exactly what overhead costs are, the most common types, and what you can do to reduce them.
What are overhead costs?
Overhead costs (also called indirect costs) are the essential expenses involved in running a business. They aren’t related to producing a specific product or service but rather the business as a whole, to support day-to-day operations.
Common overhead costs for small businesses
The overhead costs your small business incurs depends on what you offer; for example, a retail store will accumulate a different set of operating expenses than a repair shop. That said, no matter what sort of business you operate, overhead costs can be broken down into three types—fixed, variable and semi-variable—which we dig into below.
Fixed overhead costs stay consistent month to month, making them the easiest to manage. Fixed costs can include:
- rent or mortgage for an office, warehouse, or commercial space
- utilities such as internet
- government fees and licenses
- property taxes
- employee salaries
- asset depreciation
Variable overhead costs, on the other hand, may or may not appear for a particular month, depending on your business activities; and if they do, the amount won’t always be the same. Variable costs may include:
- office equipment and supplies
- marketing and advertising
- consulting services (e.g. legal or accounting)
Semi-variable overhead costs occur on an ongoing basis but the amount may vary from month to month. They also might increase as business gets busier. Semi-variable costs can include:
- utilities such as electricity and water
- sales-related salaries and commissions
- hourly overtime
- travel expenses
- card transaction fees (with Tyro EFTPOS, you can easily track monthly costs for operating EFTPOS payments via the cost analysis report in the Tyro Portal or Tyro App)
How to reduce overhead costs
While essential to running a business, overhead costs shouldn’t run your business dry. Here are some ways you can keep overhead costs down (and that bottom line up).
1. Review all overhead costs
First things first, take the time to look at all your overhead costs and identify the ones that are either no longer needed or too expensive. From here, you can scrap the ones that don’t serve a purpose and seek out cheaper alternatives to those racking up a high figure. Sometimes something as simple as paying for an expense in full, rather than in installments, can help you keep more money in your back pocket.
2. Outsource specific services
Our next tip for businesses wanting to reduce their overhead costs revolves around outsourcing. Labor costs can quickly hike up operating expenses, so rather than bringing on new employees for certain tasks, such as accounting and marketing, consider hiring a third-party to do the job.
3. Calibrate your team
As they say, teamwork makes the dreamwork but if your team structure has any inefficiencies or redundancies you could be wasting funds that would be better spent elsewhere. It’s important to periodically review your team (and their roles) to ensure you have the right mix of full-time, part-time, casual, freelance or contract staff, and that your network of employees aligns with your business operations and goals.
4. Embrace remote working
Another way you can reduce overhead costs (particularly rent and utility bills) is by letting your staff work from home. Granted, complete remote working is only viable for digitally-driven businesses but not having an office space to maintain can shred overheads – putting your business in a stronger financial position. Keep in mind, you don’t have to go cold turkey and never use an office again – you can always hire a room out when you need one for in-person meetings, presentations, or interviews.
5. Go green
Adopting certain sustainable practices can also help keep overhead costs low. For example, going paperless will save you money on office supplies, while at the same time boosting productivity and the speed in which you share information. Even something as simple as replacing light bulbs with energy-efficient alternatives can save you big bucks in the long run.
Why is knowing your overhead costs important?
When not properly managed, overhead costs can drain a business and leave you in unwanted debt. It’s important to stay on top of your overhead costs so you’re not spending more than you’re making and can maximise those profit margins.
Want to learn more about Tyro EFTPOS’ reporting tools? Get in touch!