10 Smart and Practical Ways to Cut Your Overhead Costs

For small businesses, staying profitable often means making tough calls about where to cut costs without sacrificing quality. One overlooked area for trimming expenses is overhead costs.

Overhead costs refer to ongoing expenses businesses incur beyond the direct costs of creating their product or service, such as rent, legal fees, and operational expenditures. While these expenses don't directly contribute to business revenue, they are essential to the operation and growth of the company.

Our guide breaks down the different types of overhead costs and strategies to reduce them without compromising your team's efficiency or your business's reputation.

Types of overhead costs

Overhead costs can be grouped into the following three categories:

• Fixed costs: Fixed costs remain the same month after month. These typically include rent and insurance payments, license or subscription expenses, and employee salaries.
• Variable costs: Variable costs fluctuate month to month depending on the business's needs and performance. These expenses may include raw materials, overtime wages, advertising expenses, as-needed legal service fees, and maintenance costs.
• Semi variable costs. Businesses can expect to pay for semi variable expenses regularly; however, the amount may fluctuate based on performance. For example, companies offering commission or performance-based pay will see lower costs when business is slow and higher costs when sales increase.

A company's specific overhead costs depend on its industry and business model. Fully remote companies, for example, may not pay for rent or office supplies but may spend more on collaboration software.

As a business grows, it incurs additional overhead costs, influencing its pricing strategies, profitability, and break-even point.

How to reduce overhead costs

If you need to cut your overhead costs, the first step is setting aside time to comb through every single expense and understand exactly how much you're spending — including how your habits are impacting your business credit score. Once you've taken that step, you can assess what's necessary, what can be reduced, and what should be eliminated entirely.

"Print out a profit and loss statement that spans the past 12 months," said Claudio Conte, a certified public accountant and Co-Founder of Bullstrap. "Go line by line … [and] look into each expense to determine where there are possible areas of waste or excess. Applying this practice quarterly or biannually allows for a higher percentage of funds to be devoted towards income-generating areas and cutting funds going towards wasteful areas."

This task can be daunting no matter how frequently you do it. To help, we asked entrepreneurs and small business owners how they recommend cutting costs while maintaining employee and customer satisfaction. Follow their tips as you evaluate each line item on your budget.

Make a permanent shift to remote work

Today, 55% of remote-capable businesses in the United States offer hybrid work options, and 26% offer fully remote positions, providing increased employee flexibility while decreasing internal costs. If your company can go remote, consider making the switch. If you still need to maintain a physical office, you may be able to negotiate your lease options or move to a smaller space to account for the reduced number of in-office employees.

Audit your software subscriptions

Evaluate your company's software subscriptions to pinpoint areas of overlap or services where you could benefit from free or lower-tier software plans. This helps avoid "technology bloat," where small businesses incur high overhead costs from having too many software as a service and cloud applications, said Duane Deason, Founder and President of The Efficacy Group.

"Carefully manage [your] technology stack and add to it slowly and deliberately," Deason suggested. "Consider that any technology you add [will] likely never go away and, thereafter, will demand constant fees and support. It, therefore, has to add substantial value to the company."

Scale down your variable costs

Avoid clinging to money-losing expenditures or inefficient variable costs — such as excessive labor hours or ineffective marketing campaigns — out of obligation or past investment. This type of spending falls into the sunk-cost fallacy, warned Anthony Bolognese, Owner of Capitol Hill Clothiers.

"Most people will likely stick with the things that are losing them money because they've already invested so much in that effort," Bolognese said. "Business owners … need to know when to pull out of the things that aren't creating a return."

Businesses can also reduce spending by ordering supplies in bulk and taking advantage of quantity discounts through services like Amazon business accounts.

Automate administrative tasks

Instead of hiring a part- or full-time administrative assistant to shift "back office" work off your plate, automate things like invoicing, appointment-scheduling, client follow-up, and other manual tasks.

"Those very generic and mostly simple tasks can be automated with very little effort," said Alex Kehoe, Co-Founder and Operations Director of Caveni Digital Solutions. "Even complex internal data collection can be fully automated in the same way and used to augment other automation tools."

You can further reduce costs by investing in an automated live chat service as the first point of contact for customer questions.

"Live chat systems can help multiple customers at once, and that's something an employee can't necessarily do," said Sturgeon Christie, CEO at Second Skin Audio. "You can be incredibly responsive … [and] offer a better overall customer service experience, [which] helps drive customer loyalty. The one-time investment … can save your business money, time, and stress."

Negotiate with vendors

Vendors and suppliers are often willing to help their small business clients and cut them a break, as they don't want to lose loyal customers to cheaper competitors. However, you need to ask.

"Don't be afraid to negotiate — landlords, vendors, and service providers are often open to discussing lowering costs or adjusting terms," said Ruchi Pinniger, Founder and CEO of Watch Her Prosper. "If you're not confident navigating financial decisions on your own, find an expert who can help."

Invest in culture to reduce turnover

You may have already stopped hiring new employees to save money, but it's just as important to focus on keeping the ones you have. Voluntary employee turnover costs U.S. businesses $1 trillion per year, so it's worth it to invest in culture initiatives that keep people around.

"Do what you can to raise morale and give staff members a reason to stay … even if you have to invest more elsewhere," said Jason VanDevere, CEO and Owner of Goal Crazy Planners. "I suggest more company outings, refresher courses, and getting employees more directly involved in company goals to give them a greater sense of purpose."

Evaluate your marketing strategy

As a business grows, so does its marketing spend, but before you continue with your current strategy, evaluate each channel and campaign to determine your return on investment.

"Review your marketing mix, [and] compare how much you are spending and gaining from each channel," said Irina Georgieva, Co-Founder and CEO of Enterprise League. "If, for example, you are investing a lot in PR … but you don't see a significant increase in your website traffic, it is very likely that you are targeting the wrong marketing channel."

Unconventional or less-used advertising methods can also be fruitful for businesses looking to change their strategy, noted Lou Haverty, Owner of Skid Retailer.

"Divert some … ad spending into less expensive advertising that might require more of your own time, like post mail campaigns, cold calling, and cold emailing," Haverty said. "Those types of campaigns … are much less expensive and less competitive than the more modern digital marketing campaigns."

Tap into the gig economy

If your business has made the difficult decision to lay off full-time employees but you still need help completing projects, qualified freelancers and independent contractors can help you affordably fill those gaps.

"When you hire a freelancer, you do not need to pay for benefits … [and they] are willing to work for [a] fraction of a cost compared to full-time employees," said Drew Cheneler, Senior Manager of Information Technology, Cloud, Data & AI Engineering for the U.S. Coast Guard. "Shop around and … hire freelancers who put their money where their mouth is. Make sure your freelancer has a portfolio of previous work for you to review, a Rolodex of customer testimonies, and a flexible schedule."

Go paperless

If your business still relies on physical printing, try adopting a paperless, all-digital system to eliminate multiple printing-related costs and keep you better organized. Not only is this environmentally friendly, but it can help your team develop more efficient and sustainable practices long-term.

Hire an accountant

No matter how confident you feel in your business's budget, it never hurts to have another set of eyes. A professional accountant can offer an objective analysis of your budget, help you manage expenses, and provide insights into calculating equity costs.

"[Our accountant] reduced company spending by 20% just from small things and waste alone," said Hosea Chang, Chief Operating Officer of Hayden Los Angeles. "That taught me a valuable lesson: You have way more money than you think you do. If you sit down and review your spending, you can release all those funds, cut your spending, and redirect the funds to other areas of your business."

Some source interviews were conducted for a previous version of this article.

This article was originally written by Nicole Fallon.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

The Caldwell Chamber of Commerce is a private non-profit organization that aims to support the growth and development of local businesses and our regional economy. We strive to create content that not only educates but also fosters a sense of connection and collaboration among our readers. Join us as we explore topics such as economic development, networking opportunities, upcoming events, and success stories from our vibrant community. Our resources provide insights, advice, and news that are relevant to business owners, entrepreneurs, and community members alike. The Chamber has been granted license to publish this content provided by U.S. Chamber of Commerce.