Minimising your business overheads is one way to increase the profitability of your business and put more money back into your pocket. A better understanding of your overheads can give you an insight into your business and help you make better decisions. You will be more able to price your products and services appropriately and also identify areas where you can reduce your expenses and improve profitability.
What are operating costs?
Operating costs are those incurred from the day-to-day running your business. These costs must be paid regardless of the amount of sales you are making. Examples include:
- Business insurance
- Office supplies
- Utilities – gas, water, phone, internet, electricity
Operating costs do not include cost of goods sold expenses incurred from the provision of product or service, such as the purchase of stock or raw materials. Cost of goods sold expenses are directly proportional to the amount of product or service that is sold and may be harder to reduce. In order to sell more product, you need to produce more product. Operating costs do not vary in relation to the number of sales the business makes.
Lowering your operating costs
Lowering your operating costs is one of the simplest strategies used to reduce costs and increase profitability. It is particularly helpful in times of downturn or low growth.
The cost of your business premises often makes up a big part of your overhead expenses. Review the cost of your rent and try to negotiate a lower rate with your landlord. If you have purchased your commercial property outright, speak to your lender and ask for a lower interest rate or switch to another lender who is offering a more competitive deal. You could consider relocating to a less expensive location.
More ways to reduce your overheads:
- Review all your overhead costs to reduce or eliminate expenses that are too high or unnecessary. Could you lower all costs by 10%?
- Lower the cost of your utilities by reducing wastage. Work with your staff to implement energy-efficient processes and turning off equipment that is not in use.
- Contact your telecommunications providers to negotiate a better rate for your phone and internet plans.
- Reassess your suppliers’ prices to make sure you are getting a fair deal. Try asking your suppliers for a discount.
- Look for inexpensive ways to market your business. Get creative or get out of your comfort zone and meet with prospects. You can save on paid advertising by asking your clients for referrals. Consider collaborating with other businesses and cross-promote each other.
- Control your inventory to reduce the amount of stock you hold and the time that you hold the stock.
- Implement technology to automate aspects of your business. Freeing up your employees time will allow them to perform higher value tasks that enhance productivity.
Businesses should review their operating expenses regularly to maintain a good profit margin. However, this should be done without affecting the quality of the end product or service.
When cost reduction results in poor quality or reduced customer satisfaction, any improvements in profitability will be diminished in the long run as a result of fewer customers and poor reputation. Ultimately, the business may need to compete by lowering prices and any initial cost-saving benefits gained will be lost.
Running a profitable business requires prudent management of your operating expenses. Contact Moiler to discuss how you can minimise your overheads and maximise profits.
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This document has been prepared by Moiler Partners, an Authorised Representative of Count Financial Limited ABN 19 001 974 625; AFSL 227232 (“Count”) a wholly-owned, non-guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124 and is for general information only. The presentation has been prepared without taking into account your personal objectives, financial situation or needs. You should assess whether the information is appropriate for your needs and consider talking to a Count Authorised Representative before making any investment decision. The relevant PDS should be considered before making a decision about any financial product. The information is provided as an information service only and does not constitute financial product advice and should not be relied upon as financial product advice. 8 July 2019.