The business world is being rocked by various companies declaring bankruptcy and closing. For example, Sears, which is a long-standing retail giant, is continuing to close stores and there are questions regarding the company’s future as the bankruptcy continues and the liabilities mount.
Even if your business is not the size and scope of Sears, it is clear that overhead costs can quickly pile up. Without sources of capital to address these costs, your business could suffer.
Let’s discuss what overhead costs are and how they can impact your business, as well as how you can cover those expenses.
Defining Overhead Costs
An overhead cost or operating expense is an expense required for your business to function on a daily basis. These costs will need to be paid, regardless of whether your business is generating enough income to cover those costs.
These overhead costs could involve the following:
- Maintenance and Repairs
- Advertising and Marketing
- Staff Salaries
Note that a variety of these costs are not related to how your product is made or the services that your company delivers. By tracking and managing these expenses, you can create a budget to help you keep your business profitable. How can you determine what overhead costs should be used to factor the price of your products or services?
How to Determine Your Overhead Costs
You might run a small business producing an accessory line. As part of your business model, you know how much the materials and labor cost for each piece that you produce. However, there are overhead costs that should also factor into your pricing, but these are often hidden because you do not always recognize their connection to your product.
For instance, what is the cost of leasing space with a manufacturer? How about your utilities? These costs might not be directly related the production of your product or service, they are still part of the cost of doing business and need to be including in your pricing model.
When you do so, then you can price your products to cover both production and overhead costs associated with running your business. It might seem to be complicated, but it is possible to automate these calculations. By calculating the total cost of running your company, you can price your products to cover both the production and overhead costs.
Various accounting software can give you the ability to calculate and allocate those overhead expenses for effective pricing.
Look for Savings in Your Costs
Covering your overhead costs can be difficult, especially if customers are slow in paying invoices. To help you manage your overhead costs, it is important to look for ways to save, thus making it easier to handle those costs while awaiting payment.
One area is with your lease. Perhaps you can renegotiate your lease to bring down the monthly cost in exchange for signing a longer-term contract. Also, check to see if you can sublet a portion of your space that you might not need right now or that can be used outside of your business operation hours. It can be a way to bring in another source of income.
Use marketing ideas that reduce your costs while reaching your target market. A few ideas can involve:
- Social media marketing
- Hosting free events
- Offering giveaways or freebies
- Building (and responding to) online reviews
Look at ways you are using energy throughout your business. Reducing energy usage is one key way to bring down your overhead by reducing your utilities.
Help with Overhead Costs
No matter how much you save or areas you cut, there are still going to be times when your income is less than anticipated. You might find yourself struggling to cover overhead costs. To help smooth out the slower business periods with your more profitable months, consider a working capital loan. It can provide you the ability to keep your business operating at its peak by helping you to address those overhead costs.
At Penn Commercial Capital, we can work with you to find the best working capital loan for your business.
Penn Commercial Capital can help you secure your next round of financing or business loan in an efficient and ethical manner. We’re proud to champion the small businessperson and can finance clients seeking loans from as little as $100,000 up to $100 million.