“Reduce overhead expenses to increase your profit.” This is the mantra of profitability according to business experts. You can explain the logic in a very simple way.
Profit = Income – Expenses
The best way to increase your profit is
- Increase income
- Reduce expenses
Table of Contents
The concept of expenses:
Expenses are inevitable for business. There are normally two kinds of expenses, fixed expenses, and variable expenses. You will not be able to reduce the fixed expenses. Hence, the best way to increase your profits is to reduce your variable expenses. These variable expenses are also known as overhead expenses in accounting parlance.
Overhead expenses concept
Let us look at the definition to understand what is an overhead expense or cost. This is because you have to understand the concept in order to be able to reduce them.
In very simple terms, overhead expenses are the expenses related to the day-to-day running of the firm. The overhead cost meaning changes with every industry. This overhead cost example will clear the air. For a furniture manufacturing industry, investing in timber and accessories like screws, nuts, and bolts constitutes raw material expenses. At the same time, for a retail grocery shop, the same furniture becomes an overhead expense. With the overhead definition, now it would be clear for you to understand its meaning.
However, there are certain expenses that constitute overhead expenses for almost all kinds of business concerns. We shall look at such an overhead expenses list and learn how to reduce overhead expenses.
One should be very clear in the concept that overhead expenses are independent of revenue. You have to pay for them irrespective whether the business makes a profit or a loss. Therefore it is in your best interests that you reduce overhead expenses as much as possible.
Overhead expenses list:
This is not an exhaustive list. However, we take care to include as many common overheads as possible. At the same time, we shall also look the steps you should take to reduce overhead expenses.
Rent –Every business needs premises to work from. You have to pay a lease if you take the premises on rent. In case of purchase of premises, you might have to incur mortgage cost. Rent is one of the most common of all overhead cost. You can reduce this expense by shifting to less expensive premises or by converting it into a home-based business.
Utilities – There are certain overhead expenses that no business can do without. Such overhead expenses examples are utilities like gas, electricity, water, telephones, internet, etc. These expenses are inevitable. But, you can definitely take steps to reduce them. Use appliances that consume less energy. Investing in solar energy is a one-time capital expense, but you save a lot on your energy bills. Similarly, adopting lower-cost plans for mobiles and internet facilities can also save you a considerable amount.
Interest – Usually, all kinds of SME units manufacturing as well as trading, depending on bank finance for their working capital and fixed assets. One can reduce these overhead costs for SME by investing a part of the profits into the business thereby reducing the loan portfolio. You end up saving on the interest component.
Insurance – Insurance is one of the major overhead expenses in trading as well as manufacturing. You cannot avoid insurance because it is a risk mitigating factor. However, you can plan your insurance requirements by doing research on the internet and opting for plans that provide maximum coverage by paying the minimum premium.
Repairs and maintenance –One of the overhead expenses in manufacturing concerns is the maintenance and repair of machinery and other fixed assets. You should not compromise on this aspect as it can affect your overall turnover and thereby your income. But, investing in better machines and having regular maintenance can reduce the chances of incurring expenses on repairing the same.
Administrative expenses –Administrative expenses include salaries, wages, stationery expenses, office equipment such as computers, etc. It is tough to reduce overhead expenses in this category because you need a minimum number of people to run your business. You can reduce manual labour by shifting to mechanization or computerization. You have to incur a one-time capital expenditure but you save a lot in the bargain. Office stationery such as computer printer inks and other items constitute a major part of your overhead expenses. Exercise strict control over the usage of printers, staplers, pins, and other stationery items. Every rupee you save on these items goes to reduce your overall expenses. Hence, this is an important component of the overhead costs formula.
Marketing and Sales – These aspects are essential to the development of the business. Switching over to online methods of marketing can reduce your advertising costs on TV, newspapers, and other media. You have various other methods of communications like Skype, WhatsApp, etc that offer free services. You can do your marketing using these methods. Merchant account payments constitute a major aspect of expenses in trading. Shifting from the monthly payment to charge on individual sales can be beneficial if your sales volume is low. The vice versa is beneficial if you have high volumes of online sales. Travelling is an important aspect of promotion and marketing. If possible try to book your train tickets and hotel accommodation early to save on these expenses.
Taxes –Paying taxes on time is necessary to evade the scanner of the IT dept. Delay in payment of taxes or of filing your GST returns can cause unnecessary expenses like interest and penalties. Claim your tax input properly while computing your GST returns. You will end up saving a lot on your tax payments.
Increase your income and reduce your expenses to increase the profitability of your business.
Read here to know about Working Capital.