As you prepare to start or grow your venture, it’s essential to understand your overhead cost for your small business. Overhead for a small business depends on the type of business you have and the products and services you provide.
Here’s what you need to know about overhead costs and how much overhead a small business should account for when making a plan.
What is Overhead for Small Business?
When you have a small business, you need to spend money to accomplish your goals and become successful. There are direct costs, such as the costs needed to produce a product or manage a service you offer. However, there are also overhead costs for a small business.
An overhead cost for a small business is something you might not directly connect to your business activity or something you produce. Here is a list of overhead costs for small businesses:
- Salaries for employees
- Other administrative costs
- Insurance costs
- Expenses for professional services, such as payroll management
- Property taxes you pay on real estate you own for the business
- Costs related to having a brick-and-mortar location, such as utilities
- Depreciation of equipment
- Cost of buying or renting equipment (including office equipment)
There might be other costs as well, depending on your business. Carefully consider the overhead required for your business plan as you go over how to create a successful roadmap for your business.
How Much Overhead Should a Small Business Have?
How much overhead a small business should have depends on the business. However, you can calculate your overhead cost for a small business in relation to your monthly sales to get a feel for how much you’re spending. The idea is to keep that monthly percentage as low as possible.
First, calculate how much it costs to produce your product or service directly. Look through your bank and credit card statements and review your receipts to determine whether each cost is directly involved in your business and which are indirect costs that keep the business running. The indirect costs are your overheads.
Next, add up all the overhead costs for your small business, and then divide it by your money sales. For example, if your monthly utilities, payroll, receptionist salary, and other indirect costs add up to $8,000 and your monthly sales are $30,000, you get 0.266667, or 26.7%.
So how much overhead should a small business have? A good rule of thumb is to keep overhead to 35% of sales each month.
8 Tips to Reduce Overhead Cost for Small Business
Now that you have a target for the overhead for your small business look at ways to reduce your costs. Here are some ideas for reducing overhead for a small business.
1. Review Your Expenses
The first step in managing overhead costs is to review your statements and expenses. Identify the items that are unnecessary and reduce your spending on them. Regular review can help identify those items and reduce your spending.
2. Look for Discounts
Can you get some services for a discount? Is there a way to find a lower-cost vendor for some of your overhead costs? Ask about discounts for a long-term arrangement or ask for bulk pricing. Shop around for business and professional services regularly to see if you can find a better price. Remember, comparison shopping can work to reduce business overhead costs.
3. Reduce Paper
You might be surprised at how much including paper in your business can add to the cost. It can add up when you have to pay for paper, ink, printer upkeep, and more. Reduce this overhead for your small business by switching to cloud solutions and looking for ways to cut back on paper. As a bonus, you’ll have less clutter.
4. Get Rid of Items in Storage
Keeping old equipment in storage costs you money as an overhead. Do you really need those old, barely working computers? What about those broken office chairs that you never got around to fixing? Extra desks? Clear out storage and either sell or donate items. You could get a little financial benefit and reduce the cost of keeping the clutter around.
5. Review Your Travel Needs
Have you been traveling a lot for business? If so, you might consider whether that travel is necessary. It reduces the amount of money you can put directly into the business. Instead, consider whether a video meeting would work as well as an in-person meeting.
6. Rent or Lease Equipment
Review how often you buy office or manufacturing equipment. If you often buy new equipment or are concerned about technological obsolescence, renting or leasing your equipment can make sense instead of making a large outlay to buy. Plus, you can usually get upgrades or newer models if you rent or lease equipment. Run the numbers to see if this approach might work for you.
7. Market to Current Customers or Clients
The cost of acquiring new customers or clients is often higher than encouraging repeat buyers. Look at ways to market to your current clients or customers through incentives. You can also offer referral bonuses or discounts to existing customers or clients who send others your way. This is a good way to reduce overall market costs.
8. Use Your Credit Card
A good business rewards credit card can help you reduce your overhead cost for a small business by providing you with points and cashback. Use a credit card for regular business purchases, pay it off each month to avoid interest charges, and then reap the cashback or the other rewards that you can use to offset costs.
Bottom Line
Spending money is a reality for any small business owner. However, it’s possible to reduce your costs and improve profitability by focusing on overhead costs. Consider how much overhead should a small business have, and then look for ways to manage those costs in your own business. With planning and creativity, you can keep your costs down, expanding your profit margin.
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Information contained in this blog is for educational and informational purposes only. Nothing contained in this blog should be construed as legal or tax advice. An attorney or tax advisor should be consulted for advice on specific issues.
