In the current business scenario, businesses are focussing on maintaining their profit margins more than ever. Volatile market conditions and continuous changes in consumer behaviour have made it difficult for businesses to establish a long-term footing.
Overhead expenses are indirect and fixed expenses needed for the day-to-day functioning of a business.
Utilities, rent, insurance, and salaries are some generic examples. Since overhead expenses cannot be attributed to a specific activity, cutting them down can pose to be a challenge. But it is much needed for fast-growing businesses. Because a decrease in overhead expenses provides businesses with a competitive advantage, helps price the products/services better, and ultimately, increases profit margins.
In this article, we discuss what profit margins are and how restaurant, retail, and SaaS businesses can slash their overhead expenses.
What is profit margin exactly?
Profit margin is the portion of revenue that is left a company keeps as profit after accounting for all expenses.
Investors and analysts consider profit margin to be a key metric when determining the financial health of a company and assessing its profitability.
A higher profit margin indicates that a company is more efficient in using its resources to generate profit.
Save money with in-house upskilling
When businesses need to saw down their overhead expenses to stay profitable, cutting the cost of materials or even labour can have an adverse effect.
So, even though businesses love to cut costs, employee upskilling is something they’d still like to invest in.
Therefore, a cost-effective way to achieve this is by using a higher education learning management platform.
While there are plenty of benefits of using a Higher Ed LMS for employee upskilling, we have enlisted some;
- Deliver content that’s specific to the needs of your employees, for example, they can learn at their own pace and within their own schedules.
- Employees can assess their learning, which will help you evaluate how effective the upskilling program is.
- No need to pay for expensive off-site training courses that rob of time and energy.
- Can customize the content to fit the needs of your specific business so that your employees get the best out of the upskilling program.
Moreover, with these platforms, you get analysis and reporting tools, flexible learning options, social engagement, efficient grading systems, and of course a sense of community because of their interactive nature.
Strategies to decrease overhead expenses
In this section, we walk through strategies to decrease overhead expenses for restaurant businesses, retail businesses, and SaaS businesses.
- Revisit your menu. One way to decrease your restaurant’s overhead expenses is to routinely review your menu and make changes accordingly. This could involve removing specific items that are not selling well or are too costly to produce and adding new items that are more popular with customers.
- Review your suppliers. Another way to decrease overhead expenses is to review your suppliers regularly and be certain you are getting the best prices for the products and services you need.
- Review your labour model. One of the largest expenses for any restaurant is labour. As such, it is important to regularly review your labour model to be sure you are using your staff in the most efficient way possible. This could imply making modifications to shift patterns, introducing new technologies that reduce the need for labour or outsourcing certain tasks.
As a restaurant, a healthy bottom line is what you desire. To sustainably grow profits so that your restaurant can thrive, you need to be well-versed in profit margins.
Lightspeed’s recommendation on profit margins for restaurants is a fantastic guide that deep-dives into;
- What are the reasons that lead to low-profit margins,
- What do a restaurant’s average profit margins look like
- How to accurately calculate gross profit and net profit
- And how to increase your restaurant’s profit margins
By applying the tried-and-true techniques, you will be in a better position to decrease overhead expenses and boost profit margins.
For retail businesses
- Re-imagine product packaging. Product packaging is an excellent first step to cutting overhead costs for retail brands. For example, ensure that the package fits the product size and isn’t a random custom box, or use recycled materials only for the packaging. Thinking along these lines will not only save money but also encourage eco-friendly practices.
Research suggests that packaging costs account for up to 40% of a product’s price.
So, if you can find ways to reduce packaging, you’ll see a significant decrease in your overhead expenses. Allbirds is a classic example of a company that uses a unique box to reduce packaging materials by 40%.
- Renegotiate terms with your suppliers. Retailers are often hesitant or unsure about how to approach suppliers to renegotiate with suppliers or ask for better payment terms. Here are some ways to approach your vendors successfully.
- Assess your current terms, and see where you can improve.
- Do some research on your vendors to see what terms they offer other customers.
- Prepare a proposal for the terms you would like and present it to your vendor.
- Be open to compromise. Often, you won’t get exactly what you want, but you can usually find a happy medium. At last, monitor your inventory levels, and finally, keep tabs.
- Eliminate your dead stock. As a retailer, eliminating dead stock should be a priority. Dead stock is a waste of space and resources, and at the same time, it presents a vast opportunity cost. Truth be told, every single product in your inventory that is not selling is costing you money.
To get rid of your dead stock, you can run a clearance sale or offer a discount to customers who purchase a certain amount of product. You can also donate the products to a local charity.
Another option is to sell it to a liquidator — a liquidator is a company that buys overstocked or discontinued products and sells them at a deeply discounted price. Therefore, this is a great way to get rid of deadstock quickly and without incurring any additional costs.
For SaaS business
- Invest in a reliable project management tool. Often times SaaS businesses fail to incorporate a project management tool at the start. But, investing in one can improve, streamline processes, and also help to reduce your overhead costs. For example, using a project management tool like JIRA can help you track progress and identify issues early on.
Similarly, investing in a continuous integration tool like Jenkins can help you save time and money by automating the build and testing process.
- Assemble a team of experienced and skilled developers. Take some time to set up a team with the right skills for the job. This will ensure that you won’t have to worry about the quality of your codebase or unnecessary delays. Moreover, you can focus on adding new features and scaling your business. Overhead costs usually start accumulating when the project gets delayed. As a software business, time is your biggest asset!
- Automate the development process and use serverless computing. By automating your development process, you can ship new features and updates faster, with less room for human error. Furthermore, serverless computing can help you reduce your infrastructure costs, and can eliminate the requirement for pricey on-premises hardware and software.
Moreover, cloud-based applications are generally more scalable and offer pay-as-you-go pricing, which can help you save money as the business grows.
- Implement a lean process. Although lean principles can be applied to any type of business, it is a type of business process that eradicates steps that don’t add value and the core focus is on continuous improvement. Some common methods in the lean process include — eliminating steps that don’t add value, automating repetitive tasks, and improving communication and collaboration.
Overhead cuts are often the key to a business’s success.
Overhead expenses are unavoidable expenses. They keep the lights on and the doors open. But as a fast-growing business, you may find that your overhead expenses are increasing at an alarming rate.
If you want to keep your business growing, you need to find ways to decrease your overhead expenses.
Review your expenses regularly (don’t wait for the end of the year), keep a close eye on costs at each level to identify loopholes that are draining capital and resources, invest in employee upskilling, and of course — automate as much of your business as possible to reduce labour costs.
Recommended reading: 8 Effective Techniques to Motivate Your Employees
Recommended reading: How To Use Time Tracking to Enhance Project Management
Useful: Profit Margins: Strategies to Decrease Overhead Expenses