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Managing your overheads print Print

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Good management includes keeping an eye on your overheads, because a blow-out in this area can seriously erode your profits. This guide offers you some tips on what to look for and how to manage your operating expenses.

What are overheads?

Business expenses are usually divided into two groups:

  • Variable expenses (production expenses)
  • Overheads (running expenses or administration expenses)

Variable expenses are called this because they will vary with your sales. For example, the quantity of raw material you buy in to make widgets will vary in proportion to the number of widgets you sell. If you have to employ extra staff to produce these widgets, this is also a variable expense. Manufacturers (raw materials) and retailers (inventory) usually have more in the way of variable expenses than service businesses.

Overheads are the fixed costs of running your business. Whether you sell one widget or 50,000 widgets a month, you still have fixed costs to pay. Typical overhead costs include:

  • Rent
  • Leases
  • Salaries
  • Insurance
  • Telephone
  • Power
  • Office supplies (stationery, etc)
  • Printing and photocopying
  • Vehicle expenses
  • Travel

Note, however that some 'fixed' costs can have a variable element. For example, your power bill could shoot up if you're using a lot of machinery to complete a large order, or your telephone bill could increase significantly if you launch a telemarketing campaign.

A useful guide on this topic is 'Understanding your profit & loss statement.'

Reviewing your overheads

It's good management practice to review your overheads regularly because expenses can easily creep up. People are usually budget conscious when times are tight, but when business is booming, a spendthrift attitude can set in: 'We're doing so well, we can afford it!' In these conditions overhead costs can seriously blow out.

The key ratio to monitor

Discover if your overheads are increasing out of proportion to any increase in business by dividing your Overheads by Annual Sales. For example:



Annual Sales:


Ratio: 30,000 divided by 250,000 = 0.12 or 12% (i.e., you incurred $12 of overhead expenses for each $100 of sales). You should look at this expense ratio particularly if your net profit is on a downward trend. Always aim to keep your overheads as low as possible and under control in relation to previous years.

Even if the business is doing well, a deteriorating ratio can signal that you're letting overheads creep up unnecessarily. In other words, your grip on the reins of the business is slipping. The message is that you can always cut some fat from overheads, with very pleasing results at your bottom line.


Where do you make cuts?

If you've picked up a deteriorating overhead to sales ratio, the question is now what to do about it. Here are some tips:

Look for irregularities

Studying your profit and loss statement is the easiest way to identify abnormal expense items since it typically lists overhead expenses by categories. For example, you might notice that your stationery expenses have shot up compared to last year's profit and loss statement. There might be a good reason for this (you've changed your logo) or an avoidable reason (a staff employee has ordered in a five-year supply of letterheads and other stationery items). By identifying anomalies early, you can do something about them. You really need to check your expenses more frequently than once a year. Quarterly is much better, monthly is best. One of the advantages of accounting software is that you can generate profit and loss statements whenever you need them.


The 'usual suspects'

Now see what you can do about the 'usual suspects'. Accountants who specialise in business turnarounds typically target these areas:


The biggest surge in telecommunications costs for many businesses comes with the use of mobile phones. These phones might be essential for keeping in touch with customers and clients, but they are also open to abuse by staff making personal calls. Think about ways in which you can cut down on cell phone use. For example:

  • Monitor individual accounts. This is the best way to pick up the worst offenders.
  • Set a cell phone budget for staff. This could perhaps be linked to productivity and sales levels.
  • Experiment with a prepay option.
  • Encourage staff to keep conversations short and to use a landline instead. For example, if they are close to the office, they might ask the customer: 'Can I call you back in a few minutes?'
  • Regularly review your telecommunications provider to see if you are getting the best deal. This is essential as the options change so frequently.


Advertising is an area where businesses can waste many thousands of dollars. Here are some tips to help you save money:

  • Always give preference to advertising that you can monitor. If you can't measure the results, how do you know if it's working? Once you can measure, you can also improve.
  • Make sure that your advertising is targeted and in line with your marketing and promotional plans. Scattergun advertising is usually a waste of money.
  • Avoid falling for impulse advertising or the 'great deals' offered by reps calling your office. If it's not in your promotional plan, don't do it.
  • Work out a break-even for all your advertising. How much more in sales do you need to show a profit?
  • Choose cost-effective advertising forms first. Use direct marketing: it's easier to monitor and refine. Try to get as much free publicity as possible. Would a classified ad work as well as a display ad?
  • There's nothing wrong with advertising that works. If you spend $1,000 on advertising and it brings in $5,000 extra in net profits, keep on advertising - you're onto a winner!


Motor vehicle expenses

These can get out of control. Here are a few ideas to consider:

  • Firstly, if you're driving a three-litre turbocharged 4 x 4, do you really need a car this size, or could you save by changing to a two-litre station wagon?
  • Where staff cars are concerned, a modern trend seems to be away from individual staff cars. Alternatives include a car pool, where staff needing a car during the day can use any available car in the pool, with perhaps a senior staff member being allowed to take the car home at night.
  • Another option if staff cars have been a traditional perk is to wean them off the perk by paying an allowance, for example 62 cents a kilometre for business travel, or a flat rate allowance each month to use their own cars. (Check the tax implications with your accountant first).

These options are usually significantly cheaper than the cost of providing a car.


Other areas to watch and sources of help

Other key overhead cost items to look at include business supplies, printing and photocopying and power costs. Brainstorm with staff on ways to save costs on these items.

Negotiate with suppliers

Suppliers do need a shake up from time to time: the relationship could grow complacent and the prices fat. The fact that you have an account with a supplier, or a long-lasting relationship, should not stop you from getting other quotes. You can then use these in negotiations with suppliers.

Put your insurance out to tender

If your annual insurance bill is quite high, introduce a competitive element by putting your insurance out to tender to an independent broker who is able to source insurance cover from a range of suppliers. You may be pleasantly surprised by the reduction. The article Your business insurance needs will be helpful.

Cost of renting

If your rent is creeping upwards, can you do something about it? For example, some landlords are willing to peg rent to turnover, others aren't. If a landlord is willing to link rent to turnover, this could be a win/win for both parties. It removes a risk for you (if your turnover declines, so does your rent) and provides an opportunity for the landlord (if your business does well, the landlord gets a higher rent).

Ask your accountant

Since accountants typically deal with hundreds of businesses, they are in a good position to help you identify exorbitant costs and give advice on how to reduce them. They may be able to benchmark your costs against industry averages and advise you if your business is performing better or worse than average.

Cost reduction analysts

If your business is of a reasonable size, you might be able to contract the services of a cost reduction analyst. These consultants usually work with medium to larger businesses and have a set of figures that allow them to benchmark what you spend on various items with the best prices/best sources they have identified. These analysts often earn their fees by sharing the costs they save businesses, so they can be a valuable source of advice.


Empowering your staff

Think also about incentives that encourage staff to spend the company's money as if it were their own. For example, a profit sharing scheme where cutting overheads becomes very much part of achieving the profit target.

Under such a scheme staff are likely to discipline each other for abuses or personal use of business equipment such as cell phones and cars.

Biggest theft is time

In most businesses the biggest theft is the theft of time. Time wasted by staff on personal calls and paper shuffling. Time spent on personal business by staff using motor vehicles.

Who does the buying?

Business people worried about fraud and theft tend to concentrate on looking after money coming into the business (cheques, cash, etc.) but forget that buyers can be tempted by offers of kickbacks or hidden commissions.

Should you get rid of staff?

Look at other options to lower overheads first before you consider making staff redundant as your might face significant redundancy costs and flow-on effects like lowered morale. A better option is to wait until staff leave and then not replace them or assign their duties elsewhere. But be sure not to overburden your existing staff.


Technology alternatives

To lower your overheads, look for technology solutions. These can often both save costs and speed up your business operations. For example:

  • Email is much cheaper and faster than printing and posting business letters or newsletters.
  • Email your invoices and purchase orders and submit returns (for instance tax returns) online.
  • Online buying and selling is faster and less labour intensive than conventional methods.


Further information:

To talk to an ANZ Business Specialist:
Call 0800 269 249
Visit your nearest ANZ branch


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