A start-up is having a difficult time making realistic profits. The reason? Usually, the company has too much overhead. It may be that your company has labor costs that are too high. Or, the problem may be that your company is spending too much money on unnecessary extra. That fancy office or features that your business does not use don’t look so fancy anymore. Regardless of the reason, it is essential that you identify these additional costs so you can efficiently eliminate them.
Understanding Overhead Costs
Overhead costs refer to the various expenses that are not directly in sync to what you are selling. Furthermore, these costs are not variable. These include costs such as electricity, food, water, coffee and various other costs.
Determining Your Expenses
The best way to determine your overhead costs is by determining the hourly overhead for your business. You can do this by taking the year-end expenses and dividing it by the billable hours. Then, you can determine the extent to where the revenue per hour is above or below your expenses. Sounds simple? It should be.
Hiring a Number-Cruncher
If you have a difficult time determining your expenses, one option is to hire someone to come and look at your numbers for you. This can be an accountant or some other consultant. Sometimes, having someone who can look at your numbers with a fresh pair of eyes helps. It will allow you to determine whether you are generating enough revenue to cover your expenses and generate a profit. Take the time to look at the profit that you are generating from your product or service. Also, check the costs that come with it. You might be surprised at the numbers! This form of number crunching will allow you to determine why your business is not generating a profit.
By hiring and surrounding yourself with people who are great with numbers, your company will be much more likely to be successful. When hiring staff members, you could even make this a requirement when hiring employees. Create an accounting system that tracks your most critical numbers. Make sure that you look at these numbers each week.
Determining Expenses by Department
When trying to determine which departments create the most expenses, it is best to factor in the space and labor costs. These are the factors that play the largest role in determining how much a department costs. Then, one can see whether a department is worth the associated labor costs. The downside being that the department should be shrunk by reducing the amount of space that the department uses.
Fortunately, there are many ways that businesses can reduce costs. For example, if it is too expensive to own an office space, one option is to look into shared-office spaces. It is important to look for extras that you should cut, but always carefully account for the consequences of cutting these extras. For example, even though coffee is an expense, it is a very low expense and employees will appreciate the free coffee. Other costs, such as legal fees, must definitely stay or else you may place your startup at risk.
However, rather than do without these services, it is a good idea to find ways to make these costs smaller. For example, if your business uses a lot of electricity, find out which devices use up the most electricity and find alternatives that do not use as much energy. Given that space is one of the most common costs, renegotiating a lease can also slash overhead significantly without negatively impacting your business.
When business insurance is one of your largest expenses, look for less expensive policies. Marketing is an area where it is especially important to avoid these costs. While a nationwide TV advertising campaign during prime time may be out of the reach of most startups, there are much less expensive ways to advertise that work, such as online marketing.
The Cost of Customer Acquisition
Another one of the most important costs to determine is the cost of customer acquisition. This is how much it costs to bring in a new customer who will do business with your company. This can include the labor costs that are associated with locating and introducing a customer to your company, the marketing costs, any freebies that you provide your customers and any rates you don’t charge temporarily in order to encourage customers to try your business.
One of the most common costs looked at by businesses is payroll expenses. One way to reduce this cost is to offer less pay to employees. However, another approach that would be better for morale is to find new labor-saving devices that allow for a business to get more accomplishments with fewer employees. When determining payroll taxes, your company must not only take into consideration the employee’s salary, but also state and federal taxes. It is also necessary to factor in other costs associated with hiring an employee, such as worker’s compensation insurance, health insurance and other benefits.
Knowing the numbers for a start-up is challenging at first. It may be unfamiliar for you as a business. However, after you have practiced running the numbers for awhile, it will become second nature and your business will be much more profitable. If you can think of any other ways to reduce expenses, post your thoughts in the comments below.
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