DIRECT vs OVERHEAD COSTS

Direct and overhead costs should be approached separately. Direct costs vary with output and are the ingredients for the services and products you sell. Overheads are the costs associated with keeping your business running and tend to remain relatively static despite changes in output.

DIRECT COSTS

Direct costs can be reduced absolutely (e.g. by re-negotiating) or through more efficient use of resources e.g. by reducing waste or improving productivity or methods. This will improve your gross margin which is a key business performance indicator. We find that most businesses will have improvements that can be made in this area.

OVERHEAD COSTS

Overhead costs can be reduced by close examination and questioning. List all your outgoings and scrutinise in the cold light of day ask yourself, “is this essential?” Independent help can provide you with a more objective and effective outcome. We often find businesses are paying for things they don’t really need or no longer use.

PEOPLE COSTS

For many businesses people are their greatest asset but also the greatest cost. It’s therefore important to ensure everyone is fully productive and providing excellent value for money. This means ensuring processes are optimised and staff are well trained, supported and managed to achieve great results. If you find yourself in the unfortunate position where certain roles cannot be justified, take professional advice before making redundancies to ensure you act lawfully and treat your staff fairly.

TAKE ACTION

Cutting direct costs improves your gross margin and reducing overheads leaves you with more net profit. What’s stopping you from reducing costs today?

QUESTIONS TO CONSIDER

- What wastage or inefficiency exists in my business?

- What unnecessary costs could I reduce or eliminate?

- How could I ensure costs do not escalate in future?

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