Everyone can make products and sell them to customers. But not everyone can run a successful business.
In business, success is achieved when you are able to generate long-term profits and sustainable growth while checking out all your short-term goals.
It’s nothing but a game of effective management and strategic decisions.
And since the global economy is expected to slow down in the coming years, you must ensure you manage your money well to run your business successfully.
So, in today’s post, let’s take a look at 6 common hidden costs — also called overheads — you should keep an eye on.
- 1 What Are Overhead Costs?
- 2 3 Types Of Overheads
- 3 6 Common Overheads To Keep An Eye On
- 4 Final Words
What Are Overhead Costs?
Overhead costs are expenses that are not directly related to the production of a product or service.
For example, the rent of your office space and the monthly wages of your employees are not directly related to production.
However, they are essential for running your business. This is why some people refer to overhead expenses as running costs.
3 Types Of Overheads
Overheads can vary greatly from business to business, depending on the nature of the business and industry it’s in. But in general, we can classify overheads into 3 main types.
1.) Fixed Overheads
These overhead costs stay fixed for each month. They don’t change even when the business activity increases or decreases.
Some examples include rent, employee salaries, taxes, and costs associated with government licenses.
2.) Variable Overheads
As the name suggests, variable overheads are the costs that will be different every month.
For example, you will have to spend more on transportation and delivery when the product order quantity increases.
Some other examples include office supplies, machinery repair, and legal expenses.
3.) Semi-Variable Overheads
Semi-variable overheads are fixed costs that may fluctuate with business activity. For example, sale commission rates are usually fixed.
However, if an employee makes more sales in a month, their commission will be higher than average.
6 Common Overheads To Keep An Eye On
If you’re new to business, figuring out your overheads can be difficult. To give you a head start, here are 5 common overheads to keep an eye on.
1.) Merchant Fees
If you’re a small business owner, you might be paying too much for merchant fees.
Merchant fees are the charges you pay to accept credit cards and other payment methods from customers.
These fees can range between 1-3% of each sale and are often charged by the payment provider.
To prevent this overhead, it’s important to compare merchant fees offered by different payment providers and opt for the most economical one.
Alternatively, you can use a payment solution like Smartpay that does not charge extra for surcharging.
Surcharging is when you pass on the merchant fees to your customers, and it’s a legal and effective way to keep your transaction costs down.
2.) Employee Incentives
Employees are one of the biggest and most valuable assets of your business.
If your employees are not motivated, your business won’t be able to maintain efficiency in day-to-day operations.
However, this doesn’t mean you should always use money as a motivator.
Monetary incentives are great. But when given out frequently, they can become an uncontrolled overhead.
Instead, you can increase worker motivation by other methods, such as improving communication, offering constructive criticism, and non-monetary incentives.
Check out this useful guide on increasing employee motivation.
3.) Marketing Campaigns
Marketing is just another name for communication with customers.
The more campaigns you conduct, the higher the number of potential customers you’ll reach.
So, when a business finally starts growing, it’s tempting to spend generously on this area, so much so that you might as well be running your own advertising agency.
But remember that the ultimate driver of your growth is your product or service. If you spend too much on marketing and start neglecting your product, your business will go down.
Making the right investment in or outside the company is crucial for long-term success.
For example, let’s suppose you have generated outstanding profits for a month and choose to reinvest it. You have two options to do so:
- Upgrade the aesthetics of your office space
- Develop a website
Here, choosing the second option helps you establish an online presence and attract more sales. So, it’s a better and a more strategic investment to make.
However, let’s suppose you didn’t have outstanding profits for a month and you still went ahead with website development.
This now becomes an overhead that can threaten the sustainability of your business if not managed well.
5.) Urgent Deliveries
It doesn’t matter whether you are a micro, small, medium, or large business. Companies of all sizes must focus on inventory management to prevent this particular overhead.
Typically, contracted suppliers offer you discounts on bulk purchases. However, if you don’t manage your inventory well, check predicted sales forecasts, and order the right quantity of supplies, you will run out of supplies soon.
When this happens, you’ll ask your suppliers for urgent deliveries, which are an expensive overhead for your business.
6.) Neglecting Inflation
Inflation is invasive and inevitable. It will wreak havoc on your profit margins and take away a huge chunk before you can even make sense of what’s happening.
This is why every business needs to have a plan to deal with this calamity.
If the economical situation changes and suppliers increase the cost of goods, you should know whether to increase the price of your product, switch to alternative suppliers, or do something else. Because if you don’t control this overhead, you may land your company in a difficult situation.
We hope this article was helpful in understanding the key overheads to keep an eye on.
However, this is just a short list of what can be considered ‘overheads’. Keep in mind that different businesses have different overheads, and the ones listed here may not be applicable to your business.
So as a general rule, always monitor your expenses and never forget the importance of strategizing. All the best!