Q: My accountant is telling me that my overhead costs are too high. What constitutes “overhead?”
A: Overhead costs are associated with running a business, not directly related to the costs of a product or service. These costs can either be fixed or variable. Fixed costs, such as rent, equipment maintenance contracts and advertising, are incurred no matter the level of sales activity. Variable costs, on the other hand, such as wages and payroll taxes, inventory costs and commissions, will fluctuate based on sales activity.
Q: How can fixed costs be part of overhead?
A: Many fixed costs are associated with a need – a need for a certain size space, a need for certain equipment to manage the business, the need to advertise to bolster business. Each of these costs can be evaluated to reduce the outlay of funds by challenging the actual need. Businesses change – perhaps the original space is too big for the company needs or the type of advertising is not effective. Seeking cost savings in these areas can reduce the fixed cost burden.
Q: Payroll costs are my biggest overhead, how can I reduce this?
A: Managing payroll dollars can be tricky due to business hour coverage or the need for technical expertise. Depending on the business industry, payroll may be the largest expense. Evaluating the amount of hours being paid to employees, ensuring that overtime is minimized and considering reduction in overall workforce are all methods to manage the payroll burden. Depending on the business industry, there may be opportunities to scale back business hours during periods of less volume. Managing work schedules and hours of operation can aid in the reduction of payroll overhead. I95
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