5 Proven Cost Management Strategies for Business
Sept 15th, 2019 / Haroon Juma / Accounting Blogs
Business can be tough, especially when market demand slows and competition is intense. During these times businesses should pay closer attention to costs. Ask yourself “how much sales do we need to generate a $1 profit ”. This simple question will bring into sharper focus the value of effective cost management.
Growing market share through better products and services is also important to succeed, however, cost management will be a key factor to survive.
In this blog, we will further discuss what are overhead costs and how minimizing overheads can help SMEs improve their business.
What is Overhead Cost?
It is important to identify what are the overhead costs that do work on a cost management analysis. These are expenses not directly related to the production of your goods and services. These include rent, utilities, office supplies, Legal fees, advertising and taxes.
There are three (3) types of overhead cost; Fixed, Variable and Semi-variable.
- An overhead expense is “Fixed” if the expenses are incurred regularly with the same amount regardless of sales during a specific period. Your office rent is considered a fixed cost. You need to pay a certain amount in a certain period, irrespective of your business activities.
- “Variable” cost is based on your company’s activities. Expenses for office supplies depend entirely on the volume of business activity and vary as a result. You don’t need paper unless your business requires it.
- “Semi-variable” are expenses that are a combination of fixed and variable costs. These are the expenses that have basic fees and additional fees for additional usage or services. Utilities are an example; they have minimum fees and additional fees are charged 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 things you may want to consider a few strategies to cut expenses:
- Restructuring business process
You might think that business processes would not have an impact on your company’s finances. The answer is it can affect your company’s finances in many ways.
Compare a company that has an accounting system integrated into its operational processes to one that doesn’t. A company that implements an integrated accounting system has the following advantages as examples:
(1) requires fewer employees to manage accounting works
(2) they can efficiently manage AR and improves cash collections
(3) better manages the level of inventories
When trying to reduce your overhead expenses, you may need to consider automating some of your operations activities. For example, increasing customer support will require additional working hours for existing 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. This will ultimately result in more customer satisfaction and revenue.
This involves using a third-party vendor on a contractual basis. Outsourcing is popular for many companies especially SMEs. It allows the companies to reduce their expenses related to employee salary, training, and benefits.
The advantage of outsourcing is that it can reduce your overheads and allow you to focus on your core activities. In addition, you access skilled expertise and staffing flexibility. For example, many SMEs choose to outsource their accounting needs.
- New Technologies
A range of new cost-effective technologies from Cloud to AI can help, some are even free! This can help reduce or cut some of your overhead costs depending on how you use technology in your business processes.
Let’s take a look at the impact of using social media and digital marketing. Using these platforms could reduce advertising costs while gaining data to better plan your budgets.
- Reducing Debts
Avoid taking on further debt, pay off as much as you can and talk to your creditors for a lower interest rate. These are some of the ways on how a company can reduce this burden.
These simple strategies will help reduce and effectively manage your company expenses. Any reduction in your overhead is vital for better profit margins competitiveness. Also, it has a positive impact on your cash flow.
It is always important to manage and control company expenses. These simple strategies are proven to yield the greatest benefits to businesses.
Regardless of the size of your company, working towards a sustainable cost management strategy will define your success and builds greater competitive strength.
However, any strategy should consider long-term impacts. Reducing costs may help temporarily. In the long term, your business may not compete or succeed with fewer resources.
Sacrificing the quality when competitors provide superior products and services could lead to a slow and terminal decline. Hence look for ways of reducing your cost while maintaining the best quality of the products and services to your customers.
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