Overhead costs (sometimes referred to as operating expenses) are the costs of running a business that aren’t directly linked to the products or services your business offers, but are still needed to support the running of your business.
Overhead costs can affect your profit margins if you’re not careful, especially if your business operates in industries — like travel, automotive retail and real estate — that typically have narrow margins.
Why is it important to reduce overhead costs?
If your books are consistently in the red, your business will quickly find itself in an unsustainable situation. Your profit margins, cash flow and growth prospects will all suffer if you’re spending more on daily operations than necessary. In lean times, cutting overhead costs is one of the fastest ways to reduce expenditure. It’s more time-consuming to address inventory and supply issues than it is to optimise everyday expenses.
Ways to reduce overhead costs
Overhead costs include any expenses related to day-to-day business operations. These are independent of revenue, meaning they must be paid regardless of profit or loss. Overheads include both fixed expenses, like employee salaries and leases, and variable expenses like maintenance and utility bills. Here’s how to reduce some of the most common overhead costs:
1. Rent your office space
A commercial space comprises the bulk of the overhead costs of many businesses. Purchasing an office space could be a good long-term business investment, providing an asset that could grow in value over time. But if you’re looking for a way to reduce overhead costs in the short term, this usually won’t be the best option. Buying property not only ties up your working capital but creates additional overhead costs with building maintenance.
Renting is easier on your accounts, as you’ll usually only need to pay for the deposit and first month’s rent rather than a hefty down payment. It also offers greater flexibility should you need to change locations, upsize or downsize.
2. Move to a remote working setup
According to one survey, over two-thirds of employees believe they’re more productive when working remotely – and productivity improves your bottom line. On a company-wide level, remote work eliminates the cost of commercial property completely for widespread savings. Data from Global Workplace Analytics suggests that companies could save as much as £11,000 per year for each remote worker. And post-pandemic, 74% of professionals expect remote working to become the norm, so perhaps now is the best time to make the shift.
3. Use eco-friendly alternatives
Look for eco-friendly alternatives to save money. Going paperless, for example, will cut printing, electricity, and paper costs. Switch over to long-lasting LED bulbs and motion-activated sensors that cut lights when not in use. EDF estimates that up to 40% of a business’s energy goes to lighting alone, so ‘small’ changes can have noticeable impact. Even taking the simple step to turn off laptops at night saves £35 per year per desk. Businesses looking to make a serious environmental commitment may consider becoming a certified B Corporation.
4. Consider outsourcing
It’s not only your business premises that cost money; there’s also the cost of full-time wages and benefits. Consider the cost of recruitment alone: according to Glassdoor, it costs an average of £3,000 and 27.5 days to hire each new employee.
It’s important, of course, to carefully consider whether a role should be outsourced. Outsourcing certain tasks like tax preparation, accounting, and marketing offer distinct benefits if employing a full-time employee (FTE) doesn’t make sense for your business. Not only do you save by not paying a full-time salary or wages, but you also cut recruitment costs. Outsourcing is particularly valuable if you require narrow expertise for a fixed period of time.
5. Review utility costs
We’ve already mentioned how you can save on energy bills by making your office more efficient and encouraging staff to work remotely. There are additional ways to reduce your utility costs – namely, ensuring you have the most cost-efficient deals. Between electricity, gas, water, phone, and internet services, these costs can add up to significant expenses when left unchecked. Evaluate your contracts and renegotiate terms to save on costs.
6. Automate your customer onboarding process
Between anti-money laundering compliance, Know Your Customer (KYC) obligations and fraud prevention, performing necessary onboarding checks requires additional time and resources, particularly in regulated industries like iGaming and financial services. Uploading bank statements and taking micro-deposits as part of a customer onboarding process takes a lot of manual input to keep on top of, whether that’s through FTEs or outsourcing. Automate the onboarding process and you can save money by reducing the need for manual intervention. TrueLayer’s Verification API delivers a fast, efficient onboarding experience through open banking.
7. Automate your payments process
If you take card payments from customers, all the processing, authentication, and chargeback fees can add up. Issuing refunds and reconciling payments takes up considerable time when done manually. You can automate your payment processes to cut costs. For example, TrueLayer’s Payments API offers a secure, easy way to pay. Businesses not only get 20% typical higher conversion rates in comparison to cards, but can save 0.5% - 1% of revenues by automating the associated manual processes.
How can TrueLayer reduce overhead costs?
Automation offers a straightforward way to reduce overhead costs for your business. Rather than spending time with manual tasks related to onboarding and collecting payments, the likes of instant bank payments and Verification API streamline these processes, while also combating costly fraud at the same time. The result is more money to help your business grow.