Effective small business entrepreneurs find ways to account for an intimidating array of financial demands. From minor day-to-day spending, to major long-range expenses, savvy business owners are on top of their financial flow – and for good reason. If you expect to outlast and outperform your competition, you can’t afford to leave money on the table, covering overhead and other business expenses.
Business overhead represents a set of basic spending obligations that must be met, in order for your company to engage in commerce. If you’re a retailer; rent, utilities, and building maintenance likely constitute some of your overhead expenses. An owner working in the web design business, on the other hand, may not have similar brick and mortar obligations, but would naturally spend business overhead on software and bandwidth.
Staffing costs, licenses, payroll, transportation, and other customary business spending is also included when calculating overhead, ultimately comprising your total cost of doing business. Assessing these expenses and adjusting for savings can help keep your business afloat, as your competitors flounder. Inc. contributor, David Finkel, recently explored several overhead reduction strategies to help you cut core costs.
1. Measure Labor Costs
Even with a standout product and a loyal customer base working in your favor, your small business may feel the financial strain of growth and expansion. When money’s tight, particularly in the early days of your organization’s development, employees are your most costly investment; it’s important to keep tabs on the true cost of staffing your business.
Producing a full benefit report at least twice a year can help you make an accurate reckoning, reflecting the actual cost of workers. The full scale benefit review not only considers wages, but also weighs the cost of bonuses, taxes, HR compliance, and other staffing expenses. A well-executed spending analysis details exactly where your workforce budget goes, furnishing a valuable tool for trimming overhead.
2. Stick to Strict Inventory Levels
Seasoned retailers are all too familiar with inventory struggles. Like crystal-ball mystics, retail buyers are expected to project sales in advance, with limited information. Their accuracy forecasting sales, in turn, supports precise inventory control. Under ideal conditions, buyers succeed and inventory management strikes a balance, maintaining adequate inventory to meet consumer demand, without unsold goods languishing on back-room shelves.
As a responsible buyer you know that if you order conservatively, sales may suffer, yet overplay your hand, and you’ll pay the high price of inflated inventory levels and slow product turns. The cost of ordering too much doesn’t end when you pay the invoice for slow moving goods. In addition to the wholesale price paid for inventory, you must also consider added expense for capital, storage, insurance, and other costs.
When you overbuy and store stock expands beyond a reasonable level, ballooning inventory can become a cash flow concern, slowing the movement of capital through your business. If you’re stuck with obsolete store stock, selling off or writing off old inventory may be all that’s needed to break through to overhead relief. And once you’ve found equilibrium, strict inventory discipline keeps stock levels in balance.
3. Let ROI Guide You
Entrepreneurs use various metrics weighing business success, but one clear goal shared by almost all business owners is maximizing return on investment (ROI). In much the same way you hope for strong returns on stock market picks and other investments, business spending can also be evaluated in terms of the value and profitability it brings to your organization.
ROI represents the ratio of net profit to the initial cost of an investment. You can use ROI calculations as a tool, assessing cost-effectiveness in spending areas such as:
- Expansion expenses
- Software upgrades
- Facilities improvements
- Marketing campaigns
In addition to the data gleaned from measuring return on particular business investments, incorporating the metric also fosters accountability within your organization, addressing cost concerns during the earliest stages of any spending initiative.
4. Don’t Overextend Your Resources
As your business grows and new opportunities arise, you may be tempted to divert resources and attention away from your core success. Though increased market diversity and expansion may be good for your business, at some point in its evolution, shifting your focus at the wrong time can have catastrophic consequences.
Before you dedicate precious resources to business add-ons, put your ideas to the test. Are you in a position to bounce back, with adequate reserves to rebound from a financial misstep? Will your core products and services suffer or benefit from the move? Is it smarter to do fewer things better, rather than spread yourself too thin? If careful questioning raises doubts, you may be moving too fast.
5. Make the Most of Meetings
Wasteful meetings consistently stand out as an unnecessary overhead expense shared by many businesses. Meeting too often and carrying-on too long don’t result in business efficiency; the cumbersome flow of information only slows operations. If you think you’re bogged down, spending too much time and money on meetings, streamlining your conference calendar can have a dramatic impact on productivity, without sacrificing a common sense of purpose or administrative continuity.
If you’re looking for immediate, bottom-line savings, halve your meeting time with efficiency in mind. Time spent away from the meeting room can be redirected toward achieving goals, so you’ll reap multiple benefits from cutting out wasteful face time with other key staffers.
Among the financial responsibilities you manage in order to keep your venture on track, overhead expenses represent a heavy burden, requiring ongoing payments, for as long as you’re in business. You can’t make overhead go away entirely, but you can adopt wise strategies, keeping overhead costs as low as possible. Controlling labor costs and inventory, as well as measuring ROI are key ways to keep tabs on core spending.