How to reduce your business overhead costs

Cost control and reduction of overheads play an important part in managing the margins of small businesses

• Get a better picture of your business finances. Analysing your expenditure and assessing your net margin are great places to start.
• When calculating your operating costs, remember to include all of your overhead costs such as rent and utilities.
• Once you have a clearer idea of what’s going on in your business, you can take action by switching to different utility or technology providers, for example. Try and encourage lower energy use within your business, and scrutinise costlier outgoings.

This quick guide from SmallBusiness.co.uk and purchasing service Companeo helps you consider your business spending and highlights areas where you can make some easy reductions.

1. Analyse your expenditure

This may sound obvious, but the expenditure of a business must be kept under control. Take stock and see where you can make cuts.

The profit and loss account of your business is the ideal place to start your analysis: it sets out all of the previous year’s expenditure and income. Identify the outgoings that you would like to reduce and those that you absolutely have to cut.

See also: Hidden SME overheads: The cost of poor data management

2. Check your net margin

Know exactly what margin you stand to make on your services or products. Are you charging enough to cover your costs?

3. Calculate your operating costs

Make sure you include employees’ salaries and all related costs, distribution and storage, as well as the actual cost of production. This process can also be applied to a service.

• Make a list of indirect and administrative costs. This includes rent and property expenses; utilities – electricity, water and gas; insurance; salaries of management, administrative and maintenance staff (including all associated costs such as national insurance contributions); telephone; postage and suppliers.
• Add up all the costs and expenses and subtract this figure from your turnover. This is your net margin. To work out the net margin of specific products or services, do the same exercise but only taking into account costs incurred by that particular product or service.

4. A note on business energy

Unfortunately, energy is going to be one of your most significant costs. Where domestic standing charges vary by region, commercial standing charges are determined by business size. Contracts are usually longer, too – five years for commercial compared to 12 months on domestic. You need to be certain about the package you’re getting, as commercial contracts don’t tend to include exit fees so you’ll be locked in until the end. Also note that your package will be bespoke and you won’t have dual fuel as you would on a domestic energy deal. Home-based businesses will have a domestic energy contract.

Unit rates are normally cheaper on commercial than domestic rates because they’re paid in advance on much longer contracts. Bear in mind that VAT is also higher (20% compared to 5%).

Smaller businesses will be paying a smaller standing charge so make sure that’s reflected in the overall cost as well as accurate unit pricing. There is a difference in pricing between small businesses and microbusinesses. These classifications apply to businesses in England.

Microbusinesses must have:

• Fewer than 10 full-time equivalent employees
• A turnover or balance sheet total of up to £2 million

However, if the business uses no more than 100,000 kWh of electricity per year and no more than 293,000 kWh of gas per year, they get the microbusiness rate, regardless of business size.

Meanwhile, you’re classed as a small business if you have:

• Fewer than 50 full-time equivalent employees
• A turnover up to £6.5 million or a balance sheet up to £5 million

If your business uses no more than 200,000 kWh of electricity per year and no more than 500,000 kWh of gas per year, they get the small business rate, regardless of business size.

One last thing – if you went through a broker, check to see where their fees are included and if they’re accurate.

Switching energy

Your provider should contact you with your switching options once your contract is nearly up anyway, but here’s a checklist of what you need to do before you switch energy provider or contract:

• Check if you’re even able to switch. You’re able to switch if you’ve reached the end of your fixed-term contract, you’re on a tariff you didn’t choose (a ‘deemed’ tariff) or you’re not tied in.
• Look for potential exit fees. You might still be able to leave, even if you’re not at the end of your contract. Not all business contracts have an exit fee, but if you can and the deal you’ve found is significantly cheaper, it could be worth just paying the money.
• Check for a notice period you have to give. You may be required to give 30 days’ notice, for example.
• Establish whether you have a rollover period. This lasts up to 12 months and gives you time to agree a new contract
• Shop around. Getting quotes gives you an idea of what’s out there at a certain point in time.
• Ask how much a broker will charge if you want to use their service. Find out how much they charge and which services they provide.
• Triple-check your new contract to ensure all of the information is correct before you sign or verbally agree to the deal. Agreeing over the phone is legally binding, even if you don’t sign anything.

5. Take action

Review your spending patterns, standing charges and working practices, you may be surprised by what business overheads you can save on:

• Check all your contracts and standing charges with your electricity supplier, gas supplier and telephone company. You may be able to get cheaper deals (you can compare business energy prices here).
• Control your postage costs. When you send a letter, there are paper, postage and time costs. Save up to 30% of your costs by using a franking machine with an electronic scale.
• Lower the labour cost of mailshots by outsourcing them. Let someone else do the printing, envelope stuffing and franking.
• Analyse all expenses that seem too high. There will be a way to reduce them if you do the research.
• Keep track of your energy usage. Check the classification of your electrical appliances before buying them (a class A appliance uses less energy than a class B, and so on, right down to class F). Buy energy-saving light bulbs and ask your staff to turn off their equipment and lights overnight. An appliance on stand-by uses up energy.
• A contract with a mobile phone company may mean calls are cheaper from another mobile. Are email or messaging viable alternatives for routine communication?

FAQ

Companeo helps SMEs find the right suppliers (its service is free to SMEs) via its website and experts available on the telephone. It provides suppliers with highly qualified and targeted SME leads. For more information on overhead reduction visit: www.companeo.co.uk

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