9 Proven Strategies for Managing Business Overhead Costs

Profitability slipping or cash flow feeling tight? One of the biggest culprits for small and growing businesses is overhead. By mastering the art of managing business overhead costs and using practical cost-saving strategies, you can boost your bottom line and create financial stability. On this page, we’ll walk you through the nuances of business overhead, why managing it effectively is so impactful, and cover some tips you can implement to start seeing results right away.

Business Overhead: Definition and Basics

Before we break down how to reduce overhead expenses, let’s take a quick look at exactly what overhead is and why it’s key to improving profitability.

What Are Overhead Costs?

Overhead costs are ongoing expenses that support your operations but don’t generate revenue.

Common Types Overhead Expenses

Overhead costs can be categorized into production, administrative, selling, and financial expenses. Each plays a unique role in your business operations.

Production Overhead / Manufacturing Overhead

Production overhead, also referred to as manufacturing overhead, includes costs that are indirectly tied to producing goods or services. While they don’t include materials or labor, they’re essential for production. Being able to identify and isolate these expenses makes it easier to set accurate pricing and improve profit margins. Let’s take a quick look at some examples.

• Equipment Maintenance: Servicing machines used in production.
• Factory Utilities: Power and water used at a manufacturing site.
• Depreciation: Gradual wear and tear on machinery or factoring buildings.
• Supervisory Salaries: Payroll for production managers or quality control staff.
• Factory Supplies: Tools, cleaning materials, and lubricants.

It’s worth noting that not all businesses will have production overhead. For instance, many service-oriented businesses, such as consultancies, security firms, or staffing agencies, won’t have these expenses because they don’t engage in manufacturing or product creation. If you’re in an industry that does not have production overhead, you’ll want to use terms like “operational overhead” or “project overhead” instead, as these will reflect costs that are indirectly tied to delivering your services. For instance, a staffing company would likely include recruitment tools, such as access to LinkedIn Recruiter or job board subscriptions, in these costs. Things like background checks and payroll management for temporary staff would also fit into this category.

Administrative Overhead

Costs related to running the day-to-day operations of your business are considered administrative overhead. These expenses are not tied to production or sales but are essential for keeping the business functional. Some examples are covered below.

• Office Supplies: Common office supplies such as pens, paper, and software subscriptions for general use.
• Salaries: Human resources, accounting, IT staff, and other salaries that impact the whole company.
• Utilities: Electricity, water, and internet.
• Insurance: This includes business insurance policies such as general liability or cybersecurity insurance.
• Compliance Costs: Legal fees, licensing, and regulatory filings.

Selling Overhead

Costs that are associated with promoting or selling your products or services are considered selling overhead. These expenses support revenue generation and ensure your product reaches your audience and stays competitive in the market. They do not include the cost of goods sold (COGS). A few examples are highlighted below.

• Advertising: This includes everything from social media campaigns to Google Ads and billboard rentals.
• Sales, Salaries, and Commissions: Pay for sales reps and incentives for hitting targets or commission for referral partners.
• Promotional Materials: Flyers, brochures, and branded giveaways.
• Travel Expenses: For salespeople meeting with clients or attending trade shows.
• Customer Relationship Management (CRM) Software: Tools to manage customer relationships and track sales pipelines.

Financial Overhead

Costs that are tied to the financial management of your business are considered financial overhead. These expenses don’t directly drive revenue or production but are critical for financial health. Effectively managing financial overhead keeps your borrowing costs low and improves cash flow. A few examples of financial overhead are covered below.

• Loan Interest: Payments on loans or lines of credit.
• Factoring Fees: Costs related to cash advances secured through invoice factoring.
• Bank Fees: Charges for account maintenance or international transactions.
• Accounting Services: Fees for bookkeeping or tax preparation.
• Bad Debts: Money lost from customers who fail to pay.
• Insurance: Coverage for assets like vehicles or accounts receivable.

Fixed vs. Variable Overhead Costs

Oftentimes, you’ll hear of an overhead expense being referred to as “fixed” or “variable.” It’s easier to manage them effectively when you evaluate these categories individually.

Fixed Overhead

A fixed overhead cost stays consistent regardless of how much your business sells or produces. These expenses are often predictable and unavoidable. Examples include rent or lease payments, equipment depreciation, and salaries of administrative staff.

Variable Overhead

A variable overhead cost fluctuates with your business activity levels. These expenses are more flexible and can provide opportunities to cut costs during slower periods. You’ll want to track them separately so that you can easily spot places to cut costs in slow months without impacting critical operations. Examples include office supplies, shipping costs, and temporary labor.

Direct vs. Indirect Overhead Costs

Another way to look at overhead is to determine whether the cost is directly tied to specific business activities or spread across the organization. Being able to split expenses into these categories is useful for cost allocation, especially if you’re budgeting for multiple projects or lines of business.

Direct Overhead

Expenses that are linked to a particular project, product, or department are considered direct overhead. Examples include rent for a dedicated manufacturing facility and maintenance of a specific machine used for production.

Indirect Overhead

Broader expenses that benefit the business as a whole are considered indirect overhead. Examples include utilities, office supplies, and salaries for your human resources department or accounting team.

Overhead Costs vs. Operating Expenses

The terms “overhead costs” and “operating expenses” are often used interchangeably, but they mean different things.

Operating Expenses

Operating costs include all expenses required to keep your business running every day. This is a broad category that encompasses both direct and indirect costs.

• Direct Operating Costs: Expenses tied directly to producing goods or services, such as raw materials or direct labor.
• Indirect Operating Costs: Expenses that are not tied directly to production but that are still essential for operations, such as rent, utilities, or administrative salaries.

Overhead Costs

Overhead refers specifically to indirect costs that support your business but aren’t directly tied to production or sales. It’s a subset of operating costs.

Why Overhead Management Matters

Effectively managing your overhead is crucial to maintaining a healthy and profitable business. Let’s take a quick look at the reasons behind this.

Your Protect Your Profit Margins

Overhead costs don’t directly generate revenue but they eat into your profits. By keeping them under control, you ensure your business remains profitable even when sales fluctuate.

Cash Flow Improves

Lower overhead means more cash is available for essentials like payroll, inventory, or growth supplies.

Operational Efficiency Increases

Streamlining overhead costs helps you eliminate waste and focus resources on what truly drives value for your business.

You Can Price Your Offerings More Competitively

A lean overhead structure allows you to price products or services more competitively without sacrificing profitability.

Financial Resilience Gets a Boost

Efficient overhead expense management prepares your business for unexpected challenges, like market downturns or rising costs.

Calculating and Benchmarking Overhead Costs

For most businesses, the goal is to keep overhead costs as low as possible without damaging quality or creating inefficiencies. But, you might wonder how you stack up to your peers. Are your operating costs normal? Do you need to keep chipping away at them or is it ok to divert your attention to other things for a while?

Measuring Overhead Costs

To understand where you sit, find out what percentage of your monthly sales goes to covering overhead using the following equation:

Monthly Overhead Costs ÷ Monthly Sales x 100 = % of Sales for Each Month

For instance, let’s say your monthly revenue is $250,000 and your overhead is $50,000. Your overhead rate is 20 percent.

Benchmarking Overhead Costs

Generally speaking, your overhead should be 35 percent or less of your total monthly sales. However, there are variances by industry and even within industries. For instance, a large trucking fleet might have an overhead rate of 25 percent, while an owner-operator might be closer to 20 percent. But, bear in mind this only reflects overhead costs. A typical trucking company has a profit margin just 2.5 to six percent, as Boss Magazine reports. Operating costs eat up the rest.

Meanwhile, manufacturing businesses tend to sit around 35 percent, Harvard Business review (HBR) reports. There are also some outlier industries. For instance, an SaaS company may be able to whittle their overhead rate down to five to 15 percent, while professional services firms often sit on the higher end of the spectrum, funneling 50 to 70 percent of their sales into overhead.

Understanding where your business fits on the spectrum can help you identify areas to optimize. For instance, low-overhead businesses will likely want to focus on scaling revenue and maintaining cost discipline, while high-overhead businesses should evaluate whether costs like office space or marketing align with their business growth.

9 Cost-Saving Strategies for Managing Business Overhead

Now that we’ve covered the basics of business overhead, let’s explore some overhead cost reduction tactics to leverage in your financial planning activities.

1. Review Overhead Costs Quarterly

Reviewing overhead costs regularly allows you to take a proactive approach to managing them. Perform quarterly reviews to identify trends, spot unnecessary spending, and make adjustments before costs spiral out of control.

For example, you might notice rising subscription fees for software you no longer use or excessive utility costs due to inefficient equipment. Addressing these issues promptly can save your business significant money.

A quarterly review also ensures your overhead aligns with revenue. If revenue dips, you can scale back on non-essential expenses like temporary labor. Conversely, during growth periods, you can invest in critical areas like new technology.

2. Review Contracts Regularly

Aim to review contracts at least annually. This will help ensure you’re getting the best value for services like leases, software, and vendor agreements. Over time, contracts may become outdated and you could end up overpaying or locked into unfavorable terms.

For instance, your internet provider may have introduced faster, cheaper plans, or a supplier could offer discounts for bulk orders. By revisiting contracts, you can renegotiate terms, seek competitive bids, or cancel unnecessary services.

Additionally, reviewing contracts ensures compliance and keeps your business protected. For instance, liability insurance may need adjustments as your business grows.

3. Manage Inventory Carefully

Careful inventory management minimizes overhead costs tied to storage, insurance, and obsolescence. Excess inventory can result in missed sales or production delays.

Implement strategies like just-in-time (JIT) inventory to order supplies only when need, reducing storage costs. Use inventory management software to track stock levels, identify slow-moving items, and forecast demand accurately.

4. Leverage Tech

Streamlining business operations through technology and automation can produce impressive savings. Tools like accounting software, CRM systems, and inventory management can replace time-consuming manual tasks and increase accuracy. Even small investments in tools that leverage artificial intelligence (AI) can make a major difference.

For example, automating payroll reduces the need for administrative staff, while scheduling software ensures optimal workforce allocation to avoid unnecessary labor costs.

Cloud-based tools also eliminate the need for costly physical infrastructure like servers, plus may allow teams to collaborate remotely and reduce office space needs.

5. Reduce Energy Consumption

Reducing energy usage is a simple yet impactful way to cut overhead costs. Start by auditing your energy consumption to identify inefficiencies. Replace outdated equipment with energy-efficient alternatives, such as LED lighting or ENERGY STAR-certified appliances.

Smart thermostats and motion-sensor lights can reduce waste even more by optimizing usage based on activity. For instance, adjusting HVAC systems to operate only during business hours can significantly lower utility bills.

Encourage energy-saving habits among employees, like powering down devices at the end of the day. If feasible, consider renewable energy options, such as solar panels, for long-term savings.

6. Go Paperless

A typical business saves more than $7,500 annually per employee by cutting out paper, according to Pearson research. Transitioning to a paperless system reduces overhead costs associated with printing, storage, and waste management. Switching to digital tools for invoicing, recordkeeping, and communication saves money on paper, ink, and office supplies, while also streamlining workflows.

For example, employees and clients adopt paperless practices by using tools like email for communication and electronic payments for billing. This reduces costs and also aligns with sustainability goals, which appeals to eco-conscious clients and partners.

7. Go Remote

Businesses can save over $10,000 per year per employee by going remote, Lemon.io reports. Adopting a remote work model, even partially, can significantly reduce overhead costs by cutting expenses like office space, utilities, and on-site amenities. With employees working from home, businesses can downsize or eliminate physical offices, saving thousands or more annually in rent and maintenance.

For example, a consulting firm that shifts to a fully remote model no longer needs to lease a downtown office, reducing overhead while maintaining productivity. Cloud-based tools and video conferencing software ensure seamless collaboration without needing to physically share the same space.

Remote work also offers flexibility to hire talent from lower-cost regions, reducing payroll overhead. Hybrid models, where employees only come in occasionally, further minimize costs while preserving a physical presence when necessary.

8. Cross-Train Your Team

Cross-training your employees helps reduce overhead by creating a more versatile and efficient workforce. When team members are trained in multiple roles, you can handle fluctuations in workload without relying on additional hires or temporary staff.

For example, during peak periods, an administrative assistant trained in customer service can step in to handle client inquiries, reducing the need for overtime or extra staff. Similarly, employees who can cover each other’s roles minimize downtime due to vacations or unexpected absences.

Cross-training also improves operational flexibility, so you can redistribute resources to critical areas during transitions or growth phases. Plus, it boosts employee engagement by fostering new skills and career development.

9. Outsource Non-Core Tasks

Outsourcing non-core tasks helps reduce overhead by allowing you to focus on your primary business operations. Functions like payroll, IT support, customer service, or marketing can be handled by external experts at a lower cost than maintaining in-house teams.

For example, a small business might outsource bookkeeping to a third-party accounting firm and avoid the expense of hiring a full-time accountant. Similarly, outsourcing IT support eliminates the need for costly infrastructure and salaries for an in-house team.

Leverage Factoring for a Multifaceted Overhead Win

Invoice factoring provides businesses with immediate capital for their unpaid B2B invoices. Because of the unique way it works, it can help address overhead costs on a number of fronts. For instance, with factoring, you’re in control of when you factor, which makes it easy to manage financial overhead costs. Plus, when you work with a factoring company like Charter Capital, we’ll take steps to help ensure your receivables are paid in full, reducing the risk of bad debt. We also take care of collecting the balances for you, similar to the way collections outsourcing works. If you’d like to start getting paid faster for your hard work and want to improve your overhead with invoice factoring, request a complimentary rate quote.