5 Ways to Reduce Overhead Costs
By Deena Kaye, Director in NY, CT and RI
Expense Reduction Analysts
Reducing overhead costs by 10% could yield your business a 20% increase in net profit. You would need a 20% increase in sales revenue to net the same profit. (Only assuming overhead rises exactly with revenue). And, it’s one of the fastest and easiest ways to improve earnings because every dollar saved goes straight to the bottom line. Particularly in a sluggish economy when increasing profits through sales and price hikes proves to be more challenging.
Cost cutting not only helps your company now but will also prove advantageous when you decide to sell it.
Let’s look at a company with $10M in revenue. Reducing their overhead clearly adds more to their net profit than increasing their sales.
There are 5 key areas where you can cut overhead costs:
- Insurances - General/Health Benefits and Workers Comp
- Logistics - Freight Domestic/International and Small Package (UPS/FedEx)
- Supplies - Chemical, Cleaning, Food, Laboratory/Medical, Package and Offices
- Services - Banking, Equipment Leasing/Maintenance, Janitorial, Merchant Card Processing, Payroll Processing, Printing, Records Management, Temporary Labor, Uniforms, Utilities, Waste Management
- Telecoms and IT
Start the process by reviewing your expenses in each of these 5 areas using this 7-step process:
Step 1 - Analyze Spending Patterns
Analyze prior spending patterns in those categories over the past year.
Step 2 - Conduct Needs Analysis
Determine how your business changed and is changing. Does the existing supplier meet your current and anticipated needs?
Step 3 - Gather Market and Competitive Knowledge
Find out who the key players are and if there are any niche suppliers in a given category. Get to know the pricing standards.
Step 4 - Solicit Suggestions
Ask staff where and how improvements can be made. Take advantage of your suppliers’ expertise. Ask them for suggestions on how to improve the way you work together.
Step 5 - Write a Request for Proposal
Send to your existing vendor and two or three others.
Step 6 - Negotiate
Be realistic about price objectives. Don’t allow the person in daily contact with a supplier to negotiate price. Use the good cop/bad cop approach. The “bad cop” removes emotion from the process and the “good cop” can preserve the established, day-to-day relationship with the vendor.
Step 7 - Review
After a complete cost review has been done, review on a cyclical basis.
One Midwest manufacturer – in preparation for the sale of his company – followed this process and lowered factory costs 13% with incumbent suppliers, decreased uniform costs by 28%, cut freight expenses by 33% and found 36% savings in packaging costs. That’s a substantial savings.
Analyzing your overhead is worth the time investment. Remember, a dollar saved goes straight to the bottom line.