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Handmade 101
 
   
 
Managing Overhead Expense
Author: Geoffrey Michael
Wednesday, September 10, 2014

Running out of cash is a common cause of small business failures, but it doesn’t happen all of a sudden.  It’s really a symptom of underlying problems that weren’t corrected quickly enough to put the business on a sound footing.


Paying attention to finances has to start before you open for business on day one.  While the prospect of doing this doesn’t excite many entrepreneurs, failure to do so greatly reduces your chances of success.
 
Controlling expenses is just as important as generating sales.  All the sales in the world won’t yield a profit if your spending exceeds a sustainable rate.  Here are some ideas on how to monitor and manage the way you spend your money.

Definition

Overhead or indirect costs comprise all the costs that aren’t directly attributable to your products.  Examples include rent, utilities, office furnishings and supplies, insurance, advertising, loan payments, employee benefits, and equipment maintenance.
 
To make a profit, you have to spread these costs over your products to recoup them along with the cost of production.  Reducing your overhead benefits you in multiple, potential ways:
  • Increases profit per unit, assuming price remains the same
  • Allows you to reduce prices and still earn the same profit per unit
  • Reducing prices may also increase sales volume, resulting in a greater overall profit


Space

If you work out of your home, this isn’t an issue.  If you’re renting space, it’s probably one of your biggest monthly expenses.  Evaluating the right space for your business should include an assessment of the following factors:
  • Does your location make the most sense financially?
  • Do you need a downtown storefront, or could you be in a non-central location?
  • How often will you interact personally with customers?
  • Is the square footage appropriate, and is there adjacent space that you could rent for expansion?
  • Is your business better suited for a mall or a standalone building?
  • Is the space suited for maximum productivity?
The type and size of your business will greatly influence your choice of workspace.  The goal is to save money and time by optimizing that space to fit your specific requirements.


Utilities

Technology has made it much easier to keep your utility bills to a minimum.  While some initial investment may be needed to realize significant savings, it’s worth it in the long run.

Sizable potential savings are in heating and air conditioning costs, and keeping these systems maintained is an important aspect of controlling costs.  Also important is a programmable thermostat that provides automatic turn-on/turn-off and temperature adjustment.  The Nest thermostat programs itself based on your personal schedule and adjustments that you’ve made manually.  It stores that data as it “learns” the optimum settings and continually adapts to any changes.  It can also be controlled remotely from a variety of electronic devices, as well as provide energy usage data.



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