Many Early Childcare Education businesses we work with discover they are overspending on overhead. Are you one of them? In this article, we define overhead costs and take a look at the different types of overhead. Then, we walk you through calculating your overhead so you can gauge where you stand. Finally, we suggest three ways to reduce your overhead expenses in order to make your business more profitable. Read on to find out more!
What Are Overhead Costs?
Let’s start with a working definition of overhead.
Overhead costs are business-related expenses that are necessary for your business to function. Overhead costs include professional expenses, like accounting and human resources, facilities expenses, like rent and general utilities, and administrative expenses, like software and office products. Your overhead costs are all the business costs that do not directly relate to providing the service or making the product that keeps you in business.
Operating costs, on the other hand, are business-related expenses that directly relate to the service you provide or product you sell. For example, an Early Childhood Education business may have a variety of operating costs, like classroom supplies, equipment, curriculum, and a lot more. See the difference?
In this article, we’ll focus on your overhead costs.
There are a couple different types of overhead.
The first type of overhead is fixed overhead. Your fixed overhead costs remain the same regardless of how much revenue your business makes. Here are some examples of fixed overhead costs:
- Rent or mortgage payment
- Loan payments
- Product subscriptions
The second type of overhead is variable overhead. Your variable overhead costs increase or decrease based on how much revenue your business makes. Here are some examples of variable overhead costs:
- Office supplies
- Some utilities
- Packaging and shipping
- Legal expenses
Next, we will take a look at how to calculate overhead.
How do you calculate overhead?
It’s pretty to easy to calculate overhead for your business. Here’s how:
First, add up all the monthly indirect expenses for your business. These are items like the ones we listed out in our definition of overhead: your accounting and human resources services, software programs, etc.
Next, total up your monthly revenue.
Last, divide your monthly revenue by your monthly overhead to get an overhead percentage.
Here’s the formula:
(Overhead/Monthly Sales) x 100 = Overhead Percentage
The lower you can get your overhead percentage without sacrificing the needs of your business or the quality of your childcare services, the better.
Now we will explore a few ways you can reduce overhead for your childcare business.
Three Ways to Reduce Overhead: Re-evaluate, Outsource, and Go Digital
How do you reduce overhead for your childcare business? The first way is to re-evaluate everything on a regular basis! This means going through every overhead expense you currently have and asking yourself if the expense is necessary. If it’s a necessary expense, is there a less expensive alternative?
Here’s an example of re-evaluating your overhead costs:
You analyze your business-related expenses and realize you are using a different software program for every administrative function. Do you need software to do all of these functions? Yes. Can you find a software product that offers multiple administrative services for a single subscription? Definitely! Check out this article (link to “Reconsider Your Payroll Needs” article) we wrote about payroll service providers. All of the reputable companies we mention in the article offer a suite of administrative services at an affordable price. The more you can consolidate your products and services, the more you can trim down costs.
Here’s another example:
You look through your business insurance payments and realize it’s been several years since you’ve shopped around for lower rates. You carve out some time to call your insurance provider and a few others and score a much better insurance rate than the one you’ve been paying. You’ve knocked a little bit more off your overhead costs.
A lot of your savings will happen as a result of you staying on top of your overhead expenses and constantly re-evaluating them in light of your business needs and budget.
The second way to reduce overhead is by going digital. Doing everything “the old-fashioned way” with paper not only drains your time resources, but your financial ones as well. The costs of paper, ink, and office equipment needed to keep a paper filing system in place can add up quicker than you think.
Instead, go digital! As mentioned above, there are so many great administrative products out there that help you keep track of, store, and access all your administrative “paperwork” digitally. In addition, there are fantastic apps and software programs that help you digitize your parent/teacher communications. Choose products that offer as many services—and as much value for your business—as possible. Going digital will save you time and frustration, as well as reduce your overhead expenses.
A final way to lower your overhead costs is to outsource, outsource, outsource! Why bring on a full-time (or even part-time) bookkeeper, accountant, IT specialist, marketing guru, or other professional you can’t afford when you can outsource these roles to outside professionals? When you work with a freelance professional or an outside business that specializes in your field, you bring immense value to your childcare business without locking yourself into a binding relationship with an employee. You can save a lot of money on employee payroll and benefits expenses by contracting out a lot of your administrative roles. Check out this article on the benefits of outsourcing your CFO and this one about the benefits of outsourcing your accountant. You’ll find outsourcing may be one of the most drastic ways to cut down on your overhead.
It’s no secret that the experts at Honest Buck Accounting are passionate about saving our clients money and helping them build a more profitable business. From reducing overhead to saving money on your business taxes, we specialize in helping childcare businesses achieve their financial goals. Schedule a call with us to learn how we can help.