5 Proven Cost Management Strategies for Business
Sept 15th 2019 / Haroon Juma / Accounting Blogs
Business can be tough when supply exceeds market demand. This is the time when businesses should pay closer attention to costs. Ask yourself “how much sales do we need to generate profit of $1” and this simple question will bring into sharper focus of the benefit of having a more effective cost management.
Advancing market share through better and more innovative products and services is also an important aspect to succeeding in a more competitively intense market. However, cost management will be a key factor to success.
In this blog, we will further discuss what is overhead cost and how minimizing this, can help SMEs change their game.
What is Overhead Cost?
It is important to identify what are the overhead cost and their types so that we can do our own cost management analysis. These are the expenses that are not directly related in the production of your goods and services. To name a few, these are your Rent, Utilities, Office Supplies, Accounting and Legal fees, Advertising, and Taxes.
There are three (3) types of overhead cost; Fixed, Variable and Semi-variable.
1. An overhead expense is considered “Fixed” if the expenses are incurred regularly with the same amount regardless of the volume of your business activities during a specific period. Your office rent is considered as fixed cost as you need to pay a certain amount in a certain period, irrespective of your business activities.
2. “Variable” cost is based on your company’s activities. Your expenses for office supplies depend entirely on the volume of business activity and varies as a result. You don’t need paper unless your business requires it.
3. “Semi-variable” are expenses that is a combination of fixed and variable cost. These are the expenses that have basic fees and additional fees for additional usage or services, utilities are one of the examples, as most of it have minimum fee and additional fees are charge based on usage.
Knowing how to identify your overhead cost will give you a better idea and understanding of what you need to do to reduce your overhead expenses.
Reducing Overhead Cost
Based on your company’s activities here are the things you might want to consider when cutting down your overhead expenses.
- Restructuring business process
You might think that business processes would not have an impact to your company’s finances. The answer is, Absolutely! and it can affect your company’s finances in so many ways.
Compare a company that has an accounting system integrated to their operation processes than that of the company who doesn’t. A company that implements an accounting system has the following advantages compared to a company that doesn’t:
(1) requires fewer employee to manage accounting works
(2) they can efficiently manage AR and improves cash collections
(3) manage the level of inventories, just to name a few.
When trying to reduce your overhead expenses, you may want to consider automating some of your operations activities. For example, increasing customer support will require your company for additional working hours for your existing employees and eventually hiring more employees.
With the use of Chatbots, the business can automate customer support, it can easily reduce the working hours, support desk traffic and time per ticket, which will ultimately result to more customer satisfaction. Choosing the right Chatbot program would surely be a win-win for you and your customer.
This involves using a third-party vendor on a contractual basis. Outsourcing is popular for most companies, especially for SMEs. As it allows the companies to reduce their expenses related to employee salary, trainings and benefits.
The advantage of outsourcing is not only limited to reducing your overhead cost, it will also allow you to focus on your core activities, access to skilled expertise, staffing flexibility, and more.
- New Technologies
There are a range of new technologies that are being introduced to the market, some are even free! This will help you reduce some of your overhead cost or even cut it entirely, depending on how you intend to use technology in your business process.
Let’s take a look at the impact of using social media and digital marketing in general. You may want to utilize these platforms to reduce your above the line advertisement fees while gaining richer analysis to measure and plan your advertising budget ROI.
- Reducing Debts
Do you see a lot of penalties and interest fees in your income statement? If you do, you need to consider reducing your debts.
Avoid taking on further debt, pay-off as much as you can and talk to your creditors for lower interest rate. These are some of the ways on how a company can reduce this burden.
These simple strategies will help your company reduce and effectively manage your company expenses. Any reduction in your overhead is vital in realizing better profit margins or allows your pricing to be more competitive. In addition, it also has a positive impact on your cashflow.
It is always important to be mindful of how we manage and control company expenses. These simple strategies are proven to yield the greatest benefits to business.
Regardless of the size of yourcompany, working towards a sustainable cost management strategy will define your success as long as it builds greater competitive strength.
Simply reducing costs will surely help, but it may not allow your business to compete and success with fewer resources.
Sacrificing the quality of your products and services when trying to reduce the cost might lead the failure of businesses, especially that a lot of other competitors may have an edge in winning business by providing superior products and services.
It is always wise to look for ways of reducing your cost while maintaining the best quality of the products and services your offering to your customers.
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