Every business owner knows it can be quite challenging to lower overhead without negatively affecting various business aspects (both internal and external). It’s true that in business, you have to spend money to make money; that’s inevitable. The question is how you spend that money, or more precisely, on what.
Overhead costs can be a significant drain on any business, with administrative costs being the worst offenders. Although they may seem insignificant, administrative costs can quickly pile on without anyone realizing what’s happening. To deal with them, you must be able to identify them.
What Are Overhead Costs?
Overhead costs are continuing business expenses not connected to manufacturing a product or performing a service. They are a vital part of the budgeting process and help determine how much a company should charge for its products or services to generate profit. There are different types of overhead costs, including:
- Fixed overhead costs — This type of overhead is not affected by the number of sales or production levels. Includes expenses such as rent for office space, salaries for full-time employees, and more.
- Variable and semi-variable overhead costs — Type of costs that are fully or partially affected by the number of sales or the level of production. Includes expenses such as the cost of raw materials, sales commissions, shipping costs, utilities., and more
- Administrative overhead costs — All expenses associated with business management and administration. Includes costs such as office supplies, subscriptions to administrative software, pay for administrative staff, and similar.
- Marketing overhead costs — All costs that a company incurs for the purposes of marketing and selling their product or service (i.e., the cost of advertising and customer acquisition costs)
- Research and development overhead costs — The costs associated with the development of a new product or type of service.
Out of all these different types of overhead costs, the one that companies tend to ignore the most when looking for suitable places to lower overhead is the administrative burden.
Administrative Burden: The One True Overhead Cost
Administrative burden can be defined as the time, energy, and resources needed to complete administrative tasks, comply with business or government regulations, and deal with paperwork and the company's bureaucratic process. It’s anything and everything that’s not directly associated with bringing actual value to the company but has to be done, for one reason or another.
The administrative burden can include things such as:
- Sending and reading emails
- Printing and filing paperwork
- Setting up meetings or making calls that are not related to sales
- Creating various types of reports or spreadsheets
- Manually filling out timesheets
- Manually tracking work hours
- Getting signatures from stakeholders
These types of administrative costs don’t seem like a lot individually but, when put together, create a big category of business expenses. They are the actual silent killers of overhead costs.
Instead of working on tasks that produce actual value for the company and are billable, individual employees and entire departments are bogged down in non-billable tasks, each contributing to the overall administrative burden.
Now, it’s true that some of that burden can not be alleviated. Anything related to government policies and regulations, including specific administrative requirements that companies are obligated to perform by law, there’s simply nothing you can do about those.
But what companies should do is scrutinize how they do things and look for opportunities to streamline their internal processes.
How to Reduce Overhead Costs: 5 Vital Steps in Lowering the Administrative Burden
1. Analyze Current Costs
The first step to lower overhead and administrative burden is to identify and measure all your administrative costs. The main goal here is to get a clear picture of how much money (or time) your company is investing in completing administrative tasks. You can do this by using various tools to gather the necessary data you’ll need to analyze costs.
For example, you can use time-tracking software to see how long each of the company’s administrative tasks takes to complete. Then, you can compare the number of invested work hours with the hourly pay of the employees performing those tasks to calculate how much each task costs to complete.
If you can, compare your administrative costs with those of your direct competitors or industry benchmarks. This will help you understand how well your company is performing compared to those standards.
2. Eliminate Redundant Tasks
The next step is to find and eliminate redundant administrative tasks that add nothing to your company’s operations. For example, you can evaluate your current business processes to try and identify anything that can be skipped or automated. Let’s say one of your current administrative processes is creating time reports for clients, and your usual workflow has the following steps:
- Employee creates the report
- The manager checks the report for mistakes and gives feedback
- The employee takes the input and makes changes if required
- Employee sends the report to clients
All four steps take time and take away from the billable work that creates value for your company. You can fix this issue and streamline these four steps by automating the way you make time reports. By doing this, you’ll free up more of your and your employee’s time to focus on tasks that actually matter to the company’s bottom line.
3. Use Lean Methods
Lean management is a business and management philosophy that strives to maximize the value of any process or system. It’s a set of practices that can help your company improve the way administration is managed by putting an emphasis on:
- Customer satisfaction and needs
- Removing administration defects
- Reducing the number of variables in administration processes
- Optimizing workflows
- And most of all, empowering employees
Some of the most popular lean techniques include value stream mapping (VSM), the 5S method, Kaizen, Kanban, and more.
4. Use Technology to Your Advantage
Technology can significantly help you reduce the administrative cost of your business.
For example, you can use cloud-based software to store the company's information in a secure and centralized location that can be accessed from anywhere. This can help with communication and collaboration between teams and save your company a lot of time and money it would otherwise spend on storing and safekeeping those records.
You can also use digital solutions, like an online timesheet app, to reduce the amount of paper your company uses and effectively lower overhead.
5. Track and Measure Performance
Make sure you set up clear metrics that you can track over time and see the impact they have on your company. Use those to evaluate the results of your overhead cost reduction process and see how effective it was.
Also, make sure that the overhead reduction doesn’t negatively affect your clients, customers, employees, or stakeholders. Try to collect feedback from all of them to check if there is anything they disapprove of or think could be done better. Lastly, try to review your reduction strategies regularly to ensure they align with changing market trends.
