This post is one in a series designed to help SME businesses benchmark their business and create a best practice business improvement plan across all of their business processes. You can find the links to the full series here.
What are overheads and why is managing them effectively critical to running a profitable business?
Management of overhead costs is critical to ensuring that a business is profitable. Overheads, sometimes called indirect costs are incurred by the business but do not directly contribute to the cost of the product / service. These are usually “Fixed” and do not increase significantly with volumes.
As overheads are largely not related to volumes, these are reviewed against past trends and strict budgets. Also awareness of technology changes may bring the opportunity of introducing new systems which can improve the effectiveness of sales and administration activities and reduce costs.
Cost cutting measures along with stringent budgetary control and authorisation of spend will ensure lower overheads and better profitability.
How does your business measure up?
Here’s a checklist to help you determine how well you are managing your business overheads.
- We regularly review overhead expense trends against budgets.
- We keep up to date with the latest technology available to see if this will make our sales and administration processes more efficient.
- We monitor our phone and power costs annually against the current prices available in the market.
- We regularly review advertising and marketing costs against revenue to ensure that we are achieving a return on our spend.
- We minimise discretionary costs like travel and accommodation.
- We maintain strict authorisation levels on approval of overhead expenditure.
- We ensure that indirect staff are adding value to the business in the work they are performing.
- We review the opportunity to outsource work which is not core to our business.
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