When you want to increase your profits, there are basically two options open to you. You can increase your prices, which can be hard to do if you’ve got lots of loyal customers or you’re in a competitive market. Or you can reduce your costs. And if you don’t want the quality of your services or products to deteriorate, that basically means you have to reduce your business overheads — but all too often that’s easier said than done, especially if you want your business to thrive. We’ve been helping field services businesses of all sizes reduce their overheads for over 20 years. So, if you’re wondering how to reduce overhead costs, we’ve got some great tips for you.
But before we dive into all that great advice, it’s vital you can correctly classify your business expenses. If you’re confident you can, skip this next bit, otherwise read on!
What are business overheads?
An overhead is any expense that can’t be directly attributed to creating a product or delivering a service.
For businesses that sell products, figuring out what overheads are is fairly easy. For example, the raw materials used to make a product are directly related to creating the product so they’re not overheads. Google ads have nothing to do with making a product, so the cost of those ads is an overhead.
For businesses that sell services, figuring out what overheads are is a little less obvious. The key is figuring out what expenses are directly related to delivering the service.
Labor is a good example. The salary of the person performing the service is not an overhead. Similarly, the cost of any supplies required to perform the service is also not an overhead.
But if the business runs out of an office, the rent and utility costs are not directly related to delivering the service (unless the service is to provide that office space), so they’re an overhead. Insurance is another good example of an overhead.
Something that’s a little less obvious for all businesses is the cost of research and development (R&D). E.g. the cost of developing a new product or service. R&D is closely related to the products and services a business sells, but an R&D cost isn’t incurred every time a product is sold or a service is delivered. So, R&D is an overhead.
What is an administrative overhead?
Administrative overheads are overhead costs not related to developing a product or service. These tend to be the day-to-day costs of running the business and are pretty standard across most businesses. Office supplies are a good example of an administrative overhead. The fees paid to an accountant or bookkeeper are another good example.
Businesses that directly manufacture products also have manufacturing overheads, which are the indirect costs of producing the products. Things like factory utilities and depreciation of manufacturing equipment fall into this category. Most service businesses have similar kinds of non-administrative overheads. For example, depreciation of the tools used to deliver services is not an administrative overhead.
Overheads and profit. Why is it important for your business to reduce overhead costs?
As I hinted at earlier, cutting the direct costs of delivering a product or service is difficult to do without degrading what your selling. If you cut your labor costs, you’ll end up with staff who are less experienced or less diligent. And if you opt for cheaper supplies, they may not have the same capabilities. Both situations will usually lead to a deterioration in service quality.
On the other hand, if you raise the price of your products or services without improving them or delivering something that’s a significantly better solution for your customers than what’s on offer from your competitors, then your people will just choose your competitor.
Of course, you can increase profits by selling more products or services, but only if you have the capacity to do so.
So, assuming you don’t have the capacity to increase your sales volume, if you want to increase the profits you can generate, that leaves you with reducing your overheads. And the reason I highlighted administrative overheads is that they’re often overlooked, yet are an excellent place to start reducing costs.
How to reduce overhead costs
So, how do you reduce overheads? Here are the top ways we find most field services businesses can reduce their overheads.
1. Go green
You can lower your utility bills by being more conscious of how your operations impact on the environment. For example, you can switch to more energy efficient light bulbs and send customer invoices and receipts electronically instead of having to print them out. You could also make an effort to schedule jobs so they’re geographically co-located to minimize the amount of travel your staff do. It could significantly reduce your fuel costs.
2. Review your credit card
There are a lot of business credit card options out there because not all businesses have the same needs. So it’s worthwhile reviewing yours every couple of years to ensure it’s still the best one for your needs.
3. Consolidate software subscriptions
If you’re subscribed to several related software programs, do a search to see if there’s a single piece of software that will do the same job. You may even find a single program does a better job if it means you don’t have to enter data multiple times.
4. Consider alternative communications solutions
If you’re paying mobile phone costs for each employee, take a look and see if there’s a cheaper alternative. Depending on the number of people in your team, Skype or Google Voice, Ring Central, or another alternative could offer significant savings. Similarly, consider VOIP instead of a traditional landline for communication with customers and prospects.
5. Automate manual tasks — especially administrative tasks
If you or any of your technical staff are doing significant amounts of administrative work, it’s time to automate those tasks. Estimates, quotes, invoices, receipts, and income reporting should all be pretty much automatic. If they’re not, you’re basically burning money. (And if you’ve got dedicated administrative staff doing those kinds of tasks, they could be redeployed to customer service and promotional roles that increase your revenue.)
6. Hire an accountant
That might seem like an additional overhead, but an accountant may be able to identify ways you can make significant savings.
7. Pay attention to your business’s culture
If you have a high staff turnover rate, you’ll be spending a lot of money on recruitment. In that case, take some time to identify why staff keep leaving and remedy the issue. Even if it’s going to cost you money to fix, it could still save you a lot of money in the long run. And you can end up providing a better service to your customers when your staff have a really good understanding of your business and remember your loyal customers. That can win you a lot of business too.
8. Offer incentives to customers who refer you to their networks
This is often far cheaper than traditional advertising methods and it has the added benefit of building in ‘social proof’. When people tell their friends and colleagues about an awesome service they bought from you, not only does it get the word out there about your business, but the fact that these prospects are receiving a recommendation from someone they know means they automatically trust it more than an ad, so it’s more effective as well.
Reduce your overheads with FSM software
Together, these ideas can considerably reduce your overheads. But not all of these things are easy to implement by yourself. For example, going digital if you’re currently using paper invoices can be pretty daunting. And if that concerns you, that’s nothing compared with automation!
Thankfully, there is software specifically designed for field services businesses, called field services management software or FSM software, which will make this whole process so much easier for you. Our next article in this series will tell you everything you need to know about how FSM software can save you money and increase your profits.