Business Scenario: Managing your overhead costs

Overhead costs can sometimes come as a complete surprise to any business. It’s even difficult to accurately estimate how much these costs can be because of affecting factors like the market, supply chain, a pandemic, etc. How can you plan for something that you technically can’t “actually” plan?

That’s why we’ve summed up a few ways to help you manage these overhead costs by following a fictional company we just came up with - Eddy’s Plumbing Company.

Let’s take a look at Eddy’s plumbing company. Besides the direct material costs that Eddy incurs to provide his plumbing services (e.g. pipes, taps, sealant, etc) as well as the hourly labor wages that he pays his field plumbers, Eddy’s business also incurs other costs that are not directly linked to the provision of his plumbing services but are still crucial to the running of his business. These are known as overhead costs and good examples include office rent, office repairs, fuel costs (transportation), advertising fees, insurance, telephone bills, utilities, and taxes.

These overhead costs do not essentially have anything to do with plumbing, but Eddy cannot run a smooth and successful business without them. However, as important as these overhead costs might be, it is equally important to ensure that they do not spiral out of hand. If Eddy finds that his office rent, electricity bills, and fuel costs are costing more than the business’ revenue can cover, he will, unfortunately, end up racking up losses which can be ruinous for his business.

This is where the importance of managing the overhead costs of your field service business comes to play. With high overhead costs, you can find your business struggling to make a profit, scrambling to make payroll, or easily falling to its demise in the event of an economic downturn.

So how can a business such as Eddy’s plumbing service manage its overhead costs in order to avoid the detriments of high overhead costs? The first thing to do is to calculate your business overhead. What is Eddy spending his revenue on that are not plumbing tools or supplies, or employee salaries, but are still vital to the running of the business?

If you are a business owner like Eddy, what you can do is make use of public company records to see what typical overhead costs look like in your industry. As your business begins to accumulate more and more years with financial records, you can then refine your overhead calculations by analyzing your own data. 

Tip💡:A time tracking tool like Atto, which also offers GPS tracking, will help you accurately track and calculate costs such as labor, transportation, fuel, and more.

The next step is to determine whether your business overhead is reasonable or not. You can choose to determine this based on your hourly, weekly, or monthly overhead. The aim is to compare these expenses against the money that is generated from sales within that same period. Typically, most professional service providers can have overhead costs as high as 50% of sales! If from your analyses, your overhead is taking up way too much revenue and not leaving enough for other things such as material costs, labor costs, profit, etc., then there is a need for you to reduce your overhead costs.

Tips for Reducing Overhead Costs

1. Rent: Negotiate a rent reduction where possible or get your landlord to pay for certain repairs instead through a lease renegotiation.

Furthermore, consider sharing space with a complementary business. There are many co-working spaces that can accommodate more than one business. 

2. Payroll Accuracy: The wages that Eddy pays his plumbing technicians to fall under labor costs, but the salaries of other employees in other departments of his company are overhead costs. Thus, for his other employees whom he also pays an hourly rate, Eddy would also need an effective time tracking software to help him accurately calculate payroll and ensure that his employees are not either overcompensated or under-compensated.

3. Staffing and Scheduling: There are ways to reduce staffing costs without actually cutting staff. For example, if Eddy were to properly schedule his field workers for their weekly projects so that they are on time for appointments and able to finish the work that they have for each day quickly and effectively, this will reduce or even totally eliminate the need to pay his workers overtime. An effective time tracking like Atto solution can easily help Eddy to achieve this.

4. Free Marketing: If your promotional overhead expenses are notably high, there are free and effective ways to get your business out there and draw in new clients. One of these methods is promotion using customer feedback and positive ratings to display the value that your business provides to potential customers.

5. Go Green: Utility costs can get really high if you are not careful. Opting for more eco-friendly alternatives like LED bulbs, green outlets, and energy-saving power strips may be expensive upfront, but you will save more on utility costs in the long term. More ways to go green include going paperless to save on paper, printing, and electricity.

Last Words

Reducing your overhead costs is exceedingly beneficial. Cutting small costs here and there can add up to huge savings over the long term. You do not need to drastically re-budget or downsize. Simply reassess the current financial situation of your business and find where you can drop costs little by little!