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The Best Way to Reduce Overhead Costs for Small Businesses

The Best Way to Reduce Overhead Costs for Small Businesses

When margins start to grow thin, the temptation to decrease overhead becomes strong. The idea is that by cutting overhead, you cut your costs without affecting your business.

Unfortunately, most people go right to cutting staff, maintenance of equipment or office space, and marketing. By doing this you lower productivity and income, and it rapidly becomes self-defeating. Fortunately, there are some things you can do to reduce overhead costs without impacting your business.

The Meaning of "Overhead Costs"

Overhead costs are the routine costs of running your business. Overhead does not change whether you are making a profit or incurring a loss.

Overhead must be distinguished from operating expenses, which include anything involved in making your product or directly providing your service. For example, if you run a HVAC business, the salary of a field technician who goes to people's homes to do repairs is an operational expense. The salary of the person who answers the phones at your office, however, is overhead. Operational expenses cannot be cut if you want to continue to run your business.

Overhead costs include office supplies, administrative salaries, lease, or a mortgage on your business premises. It also includes sales, marketing, and accounting. These expenses can be cut without affecting your ability to provide your service, although it is still possible to cause major problems by cutting overhead incorrectly.

The Wrong Way to Reduce Overhead Costs

There are some things people jump to so that they may reduce overhead costs. These options seem to make a lot of sense, but can cause your business severe pain in the long run. Here are four to be particularly careful of:

  1. Reducing staff. Cutting administrative staff is by far the easiest way to reduce overhead quickly. However, it leaves your remaining staff harried, overworked, and more likely to quit. It also means that when times improve, you have to incur the costs of onboarding replacements. Cutting pay or hours is a very quick way to cause staff to look for another job.
  2. Shrinking your office. If your office is legitimately too large, then this can be a good way to reduce costs. But moving to a smaller office also affects employee morale, particularly if people who previously had offices are forced into cubicles.
  3. Using less office supplies. On the face of it, going paperless appears to be a no brainer, but the cost of extra software you might not have realized you needed can easily wipe out the gains. 
  4. Cutting marketing costs. Again, this is not something you want to do in a hurry. Advertising that is not working needs to be discontinued, but if you cut the marketing budget too far, you won't attract new customers and will go into a downward spiral.

However, there is a way to reduce overhead costs that doesn't reduce productivity, decrease income, or cause you to hemorrhage remaining staff.

Reduce Overhead Costs With HR Outsourcing

Ah, but we already said cutting staff was bad, right? 

HR outsourcing is not about cutting your administrative staff, but rather about taking tedious duties away from them with an outsourcing solution.

Outsourcing payroll saves a lot of time. Outsourcing compliance saves even more. By taking away the tedious duties, you allow your HR staff to do a better job of looking after your employees, which in turn reduces expensive turnover.

However, it's also possible to outsource HR badly. Just outsourcing payroll, for example, while it saves time, tends to end up costing more in the long run.

So what is the solution?

Why Use a PEO?

The solution to HR outsourcing with a positive ROI is a Professional Employer Organization (PEO). When you partner with a PEO, you enter into a co-employment relationship in which the PEO is the employer for tax and compliance purposes. Meanwhile, you retain full control of your employees for daily operations. 

This is the only HR solution that gives a positive ROI in the long term. Because of shared liability, PEOs are incentivized to help your business grow. And they can either be your HR team or help your HR team shine.

How PEOs Reduce Overhead Costs

PEOs reduce overhead costs in several ways:

  1. Reduced health insurance costs. Getting health insurance for five or ten employees can be costly. With a PEO you share the risk and cost over a larger group of people, as your employees are covered by plans purchased by the PEO and shared with their other partners. You can still choose from a number of health insurance options to suit your people's needs.
  2. Reduced workers' compensation costs. For the same reason, your workers' comp premiums also go down, as do premium hikes if you have an accident. The larger pool of shared risk benefits everyone.
  3. Lower administrative expenses. Studies show that administrative services done by a PEO are as much as 21% less expensive.
  4. Lowered opportunity costs. Because your HR staff aren't dealing with mundane activities, they can focus entirely on attracting and retaining top talent.
  5. Reduction in high voluntary turnover. With a PEO, your team has better health insurance for less, and has the attention of HR staff. This lowers high voluntary turnover. Turnover results in high costs for onboarding and time lost for training new employees. It can also wreck your business culture, lowering productivity and morale.

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In other words, PEOs are a great way to reduce overhead costs without impacting productivity and profit. Better benefits for less cost increase productivity. Your HR team can do a better job, and you will pay less for administrative expenses and workers' compensation. To find out more about how to reduce overhead costs, talk to us at OneSource about how we can help you with all of your HR needs.


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