How To Reduce Overhead In Your Small Business

Running a small business is no small feat. You pour everything you have into your company to come through for your customers. You may still find yourself facing rising overhead costs. To thrive, you need to learn how to reduce that overhead. 

The good news is that the process is easier than you might expect. With tools like When I Work, you can improve scheduling and slash labor costs. Try When I Work for free.  

Key takeaways:

Here are the key things you need to know about how to reduce overhead:

• Overhead refers to ongoing expenses not tied to producing goods or providing services
• Elevated overhead can cut into your profit margins
• Inefficient scheduling can increase labor costs and contribute to higher overhead
• Employee scheduling software can automate tasks and help cut your operational costs
• When I Work can optimize scheduling and reduce administrative labor costs to decrease your overhead

Table of contents:

• What is overhead?
• Business consequences of having high costs and overhead
• How inefficient scheduling can contribute to high costs and overhead issues
• Why you should consider workforce management software to decrease costs and overhead impact
• How When I Work can help you reduce labor costs and address overhead

What is overhead?

Overhead refers to the ongoing costs of operating your business. It does not include costs associated with making products or providing a service. For example, ordering inventory to perform repairs is not part of overhead. 

What does count as overhead? Any expense necessary to keep your business running is usually part of your overhead. This includes costs you will incur regardless of how much you produce or sell.

Your overhead expenses affect pricing, budgeting, and profitability. Industries like manufacturing, retail, and healthcare tend to have higher overhead costs. That’s because they spend more on facility maintenance and utilities. 

Examples of overhead in practice

Let’s say you run a restaurant. Your overhead may include the following:

• Rent or mortgage payments
• Utility bills
• Insurance
• Equipment maintenance
• Marketing expenses
• Salaries

These costs are incurred regardless of how many people you serve each day. Industries like healthcare encounter additional overhead. They spend more on equipment maintenance. Medical supplies that aren’t directly tied to patient volume also count as overhead. 

Calculating overhead

Your overhead should not exceed 35% of your business’s total revenue. Use this formula to determine your overhead rate:

Overhead Rate = (Total Overhead Costs / Total Sales) x 100

For example, if your small business has monthly overhead costs of $5,000 and monthly sales of $20,000:

Overhead Rate = ($5,000 / $20,000) x 100 = 25%

This means 25% of your sales revenue goes toward covering overhead expenses. 

Business consequences of having high costs and overhead

High overhead costs can have several negative effects on your business. 

Reduced profit margins

If your overhead costs are high, they consume a larger percentage of your revenue. This means less profit. 

For example, let’s say your overhead rate is 40%. You only have 60% of your revenue to cover other expenses and generate a profit. On the other hand, if your overhead rate was 30%, the remaining 70% would go toward other expenses and profit. 

Staffing cuts

Businesses sometimes reduce their staffing levels to lower overhead costs. While this tactic can decrease your overhead rate, it has unintended consequences. For example, working short-staffed can result in longer customer wait times. Understaffing can also lead to burnout. 

Inflexible employee scheduling 

You need flexibility when planning employee shifts. Flexibility is especially important if your business relies on rotating schedules. High overhead can limit your ability to be flexible during scheduling. If you are already exceeding the 35% overhead threshold, you may be hesitant to bring in extra employees. 

Limited growth opportunities 

You need profits to grow your business. Excessive overhead means you don’t have the financial leeway to expand. 

Think about it. You wouldn’t open a secondary location or expand your fleet of service trucks if your margins are already razor-thin. You need to slash overhead costs to give yourself some breathing room to grow. 

How inefficient scheduling can contribute to high costs and overhead issues

High overhead can usually be linked to inefficient scheduling practices. Let’s say that your shifts are overstaffed by two people at least 50% of the time. That means you are paying hundreds of hours of wages for two extra employees every single month. 

Overstaffing means paying for unproductive hours. Those costs can quickly wreck your margins.

Understaffing may seem like it would improve your overhead costs. At first, it might. However, frequent understaffing can result in employee burnout and a poor customer experience. Over time, you may lose loyal customers and see a drop in revenue. This will further decrease your profit margins. 

Why you should consider workforce management software to decrease costs and overhead impact

Workforce management software facilitates workforce optimization and helps you cut your overhead costs. Here’s a closer look at what you can achieve with workforce management software. 

1. Automated scheduling reduces time and costly errors

Workforce management tools include automated scheduling capabilities. These tools eliminate the need for manual scheduling, which is prone to human error. You can prevent mistakes like double-booking or scheduling people outside their normal hours. 

Let’s say you run a retail store. Automated scheduling will help you avoid overstaffing on slow days. It will also limit understaffing on busy days. You’ll also save administrative hours. More importantly, you can ensure you have enough people at work to serve your customers. 

2. Labor cost management through real-time tracking

Real-time shift tracking makes sure employees get paid for the hours they work. You can use this feature to prevent overpayments or time theft. With a solution like When I Work, employees will clock in and out via our mobile app. You will receive instant updates on attendance and shift changes.

Let’s say you run a small logistics company and track attendance with When I Work. The real-time monitoring features will review patterns of late arrivals. You can intervene to improve punctuality and ensure payroll accuracy. 

3. Overtime management tools minimize premium wage costs

When I Work tracks employee hours. It alerts you when someone is approaching overtime thresholds. You can approve the overtime or make adjustments to minimize your labor costs.

For example, a restaurant could use this feature to redistribute shifts. It could give evening shifts to part-time employees once full-time staff reach their hour limits. The result is better cost control and compliance with labor laws. The restaurant may also reduce the risk of employee burnout.

4. Integration with payroll systems reduces administrative overhead

Many employee scheduling tools integrate with payroll systems. These integrations eliminate the need to manually transfer time clock data from one app to another. Think of all the time you’ll save.

Timesheets sync with payroll software, so by integrating these tools you could cut processing time and eliminate errors that previously resulted in overpayments. 

5. Data-driven decision making optimizes workforce efficiency

Scheduling software provides analytics and reporting tools to help you better manage your staff. You can track operational costs and absenteeism trends. If you notice a concerning trend, make proactive adjustments to promote productivity. 

Let’s say you run a fitness studio and want to analyze morning class attendance. If morning classes are overstaffed, you could reallocate resources to busier evening sessions. This simple change ensures you have enough staff on hand to serve your customers while also keeping payroll costs in check. 

6. Employee availability matching reduces turnover and hidden costs

Employee management software also makes it easy to track employee availability. You can match workers with their stated availability. The software ensures shifts align with individual preferences, which boosts morale and reduces turnover. 

You’ll start by inputting employee availability into the system. The software will use your inputs to create schedules that respect those preferences. You can use this feature to respect part-time workers’ preferences. If you schedule them during preferred hours, your employees will be more likely to stick around and show up for their shifts. 

How When I Work can help you reduce labor costs and address overhead 

When I Work employee scheduling software includes all the tools you need to regain control of your labor costs. The time clock makes it easy to track and log each person’s hours worked so you can mitigate overtime costs. 

Additionally, the team messaging feature ensures everyone is in the loop about the current schedule, which cuts back on conflicts and missed shifts. 

By improving the way you schedule and manage your workforce, you can cut overhead and improve profit margins. When I Work also integrates with popular payroll platforms, saving you even more time and effort. 

Try When I Work free to manage your labor costs, schedule your staff, and more

Don’t let excessive overhead costs derail the growth of your business. Implement When I Work and modernize the way you manage your workforce. Our platform includes everything you need to schedule, track, and optimize your staffing. 

Try When I Work for free. Once you start scheduling with When I Work, you’ll never want to do business without it again.