Cost is always a part of a business and reducing overhead costs is as important as saving on direct materials and costs.
Overhead is a problem not just for large-scale operations, it is also very crucial for small to medium-sized businesses. The term indirect cost sometimes understates this element of the statement of profit or loss. One must always remember that a big chunk of revenue might be taken by overhead expenses. In some cases, indirect costs are greater than direct ones and may result in a big hit on revenue or even loss.
A Deeper Look Into Overhead
Controlling and reducing overhead costs requires understanding where these costs come from. There are actually several elements where overhead can be traced, the best solution is a solution that covers most of these elements.
Overhead is mostly traced to the following:
- Utilities – utilities take up a big chunk of overhead. This includes electricity, water, internet, etc. These may be fixed or variable to production.
- Administrative Expenses – Administrative expenses include salaries of personnel from the back office management to management support teams. These salaries are for services not directly attributable to operations but are vital to ensuring quality and the smooth flow of business.
- Rent, Equipment, and Facilities – Includes property, plant, equipment, and leases on such. For small to medium-sized businesses, this includes computers and the space used for accommodating tasks that are not directly related to production. This includes the property and equipment used for sales, accounting, recruitment, etc.
- Marketing and Sales – Similar to administrative, this includes salaries of salespersons, marketing personnel, insurance, benefits, etc.
All of these elements have their corresponding methods of control. Avoiding unnecessary use of utilities, cutting on the use of some equipment may help alleviate the burden of these expenses. When it comes to administrative, marketing, and sales, some resort to downsizing but this step might take a toll on quality and sales.
Finding the Right Solution
There are a number of ways for controlling and reducing overhead costs, each method mostly covers just one element of overhead. But there is one solution to all of these, a solution that is practiced by most major companies—outsourcing. When a company uses an outsource, it saves not just on salaries but also on facilities, utilities, and administrative costs.
Outsourcing is not only ideal for multi-million dollar companies, nor is it solely for manufacturing. Small to medium-sized businesses can also benefit greatly from outsourcing. Here are some of many examples:
- Professional Firms – Lawyers. real estate brokers or Realtors, and the such can delegate clerical tasks like email management and appointment-setting, lead generation, and even telemarketing to outsources. Doing this would greatly reduce overhead cost as it covers administrative, equipment and utilities.
- Merchandising Companies – No matter how large or small a company’s market is, it is very important to have customer service, sales, and office admin support personnel. Together with these departments come overhead costs like salaries and equipment.
- Financial Companies – Financial companies are burdened with loads of clerical tasks like data entry and processing. Data entry and processing is one of the most outsourced tasks. Outsource companies have data entry and processing specialists and their own quality assurance teams so you save a lot on salaries and facilities.
There are a lot of other business processes that a company can outsource. Find out more on how your company can save on cost through outsourcing and optimize your revenue.