When a recession might be on the horizon, it’s time to consider cutting costs. However, many businesses reduce overhead without considering how it will affect their employees. This can lead to employees leaving the company, increasing hiring costs and canceling any savings from reducing overhead expenses.
To avoid this outcome, you must identify which overhead costs you can cut without lowering employee morale and employee retention.
To do that, you’ll need to know your cost-cutting options.
What Counts as Overhead Costs?
Knowing the overhead costs associated with running your business is essential for a small business owner. These include:
Fixed Overhead Costs
Fixed overhead costs are the costs of doing business that don’t change with the number of products or services a company produces. They’re fixed because they don’t depend on the number of units produced.
Some typical fixed overhead costs include rent, insurance, and wages for administrative staff. To calculate total fixed overhead costs, you need to know how much your company spends on these expenses each month or year.
Variable Overhead Costs
Variable overhead costs are the expenses that fluctuate with changes in production volume. Examples of variable overhead costs include electricity, raw materials, and labor. Variable overhead costs are critical when setting prices for products or services, as they can significantly impact profitability.
Variable overhead costs can be tricky to manage as they fluctuate significantly from one period to the next. Careful planning and forecasting are essential to control variable overhead costs.
Semi-Variable Overhead Costs
Semi-variable overhead costs are those that vary with production volume but not in a directly proportional manner. In other words, they do not change direction to changes in production volume. They may increase or decrease as production volume changes, but the difference is not always the same. Semi-variable overhead costs often contain both fixed and variable elements.
Some examples of semi-variable overhead costs are:
- Depreciation on equipment that is used both for production and non-production purposes
- Wages of factory workers who perform both production and non-production tasks
Now that the types of overhead costs are clear, it’s time to address how these costs can be sustainably cut.
The Wrong Ways to Reduce Overhead Costs
There are several wrong ways to reduce overhead costs:
1. Cut Staff
No business owner wants to see their overhead costs get out of control. However, cutting staff is often the wrong approach to reducing those costs. It sends a message to the remaining employees that they are not valued or appreciated. This can lead to a decrease in productivity.
2. Shrinking Office Square Footage
Shrinking office space can lead to overcrowding and claustrophobia. When employees are crammed into a smaller space, it can be difficult to concentrate and be productive. In addition, it can be uncomfortable to be close to other people for so long.
3. Reducing Perks
One of the most common ways businesses try to reduce overhead costs is by cutting employee perks and benefits. While this may save the company some money in the short term, it can cost the business more in the long term. Employees will be less motivated to work hard and less likely to stay with the company.
4. Downgrade Software
When employees are using lower-quality software, they are more likely to encounter problems and bugs. This can lead to frustration and a feeling of being unappreciated. In addition, using lower-quality software can slow down employees’ work, as they have to work around the issues with the software.
5. Poorly Implemented HR Outsourcing
If you’re looking to reduce your company’s overhead costs, HR outsourcing may be the way to go. But beware: poorly implemented HR outsourcing can lead to significant problems.
HR employees may think they’ll lose their jobs, and non-HR staff may worry they’ll lose access to HR representatives. These problems can lead to reduced productivity and increased turnover.
The Right Ways to Trim Overhead Costs
There are ways to reduce overhead costs sustainably. For example, your business can:
1. Go Paperless
Going paperless can also help you be more productive. When you have all your documents in one place, it’s easy to find what you need. You can also share documents electronically, saving you time and hassle.
2. Transfer to Remote Work
One way to do reduce overhead costs is by shifting to a remote-work model. Moving to a remote model can help reduce or eliminate many traditional office expenses, such as rent, utilities, etc.
3. Eliminate Unnecessary SaaS Subscriptions
If you have a bunch of SaaS tools that you’re paying for but not using, it’s time to eliminate those subscriptions. Not only will you save money, but you’ll also declutter your digital workspace and make it easier to find the tools you need.
4. Automate Tasks
Automation can help you save time and money in several ways. For example, automating your billing process can help you save time on data entry, and automating your payroll process can help you save time on processing payroll. Additionally, automation can help you save money by reducing the staff needed to complete specific tasks.
The Best Way to Reduce Overhead
Here is the real deal for all:
5. Properly implemented HR outsourcing
The best form of HR outsourcing is a Professional Employer Organization (PEO). A PEO provides a comprehensive HR solution, including payroll processing, benefits administration, workers’ compensation coverage, and more.
However, a PEO does NOT aim to replace your existing HR employees. It will not break the connection between your in-house HR employee (if you have one) and the rest of your workforce. It will make it so you don’t have to hire extra HR employees to take on administrative burdens.