How to manage overhead costs

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Business overheads can very quickly mount up and turn into net losses for the company, unless you take control of them before they reach that level. Regular financial reports that outline profit and loss, income, and cash flow will help you to maintain the situation, but it may be necessary to make some cuts to increase financial stability.

What are corporate overheads?

These are the costs you have in order to keep the business running, like the premises, cost of payroll, marketing, and equipment. The cost of running your company and the expense of producing your products or services all make up the corporate overheads. If you have a large company with various different departments, you will also have departmental overheads, which may vary from department to department. You may have these overheads to pay for even when your product isn’t being produced.

First step to controlling costs

Initially, you need to identify corporate overhead. Ideally, you will already be recording these costs on a financial statement or other report, but if not start straight away so that all overheads can be monitored closely. Place your overheads into sections according to function, like sales, marketing, information technology, administration, and human resource.

Consult with departmental heads

Arrange a meeting with all heads of departments so that you can look at ways to reduce overhead costs. Provide a report that indicates the overheads generated by each department. Ask them to consider how costs can be reduced, without any drop in quality, fall in production, or efficiency. Some businesses provide an annual budget for each department and every year the departments apply for a budget based on financial reports. One of the largest expenses of any business is the cost of labor, which is why many companies consider outsourcing for a number of tasks.

Control purchases

It is possible that departments are spending on items they don’t need, so ask each department to monitor its own spending. Set up a system so that employees of the company have to have spending approved before it can go ahead. Restrict this to an amount above a certain level, so that managers don’t have to approve all the smaller purchases. Consider asking the manager of purchase control to shop for a better deal on many of the regular items purchased. To incentivize this, you could even consider introducing a reward scheme so that the purchase manager gets a bonus if they manage to cut costs without sacrificing quality.

Review annual costs

Every year, consider the regular payments made by the business and how they could be reduced. Don’t automatically renew contracts or leases before checking for a better deal elsewhere. It’s possible that the contractor will be the best price available, but they may offer an extra service or a bonus as an incentive to remain with them the next year. Compare prices for all other overheads, like utility bills and even the cost of the business premises if it’s on a lease, so you can save money each year.