In this article we cover some basic ideas around cutting overhead costs in Driving Schools.
Every business incurs costs. They are inevitable, and usually the saying goes “The more you spend the more you make”. I can understand how “they” can make that comment as long as they speaking to marketing costs which should bear a relationship to sales, but it’s dangerous to apply that thinking to all types of business cost.
The costs of running a company are often hidden and not as obvious as one might expect, but can be substantial and can easily pose a threat to any business if not managed appropriately. Cutting fixed costs is as effective as cutting the direct variable costs of labor and materials. Unlike manufacturing costs, most administrative costs are “fixed,” in that they rarely vary from month-to-month, even though revenues go up or down.
Figuring out how to reduce or eliminate specific administrative costs is essential to the profitability and long-term success of your company. Trimming these expenses will decrease the revenues necessary to make a profit, provide greater flexibility in long-term pricing strategy, and improve cash flow. They may even be what you need to do to keep afloat. It’s amazing how many business’s go bang because they cannot control their fixed overheads.
Fixed overheads are the costs that the business needs to pay on a monthly basis irrespective of the sales they make, IE, Rent, Lease costs, Salaries and Wages, Electricity and Water. Fuel is an example of a variable cost because there is a relationship between the number of lessons done and your fuel costs. Maintenance costs are an example of a semi fixed costs because it can be argued that there is a fixed component and a variable component.
Running a business requires spending money just as much as it requires making it, which is the sometimes most important part. These overhead costs, which many business owners place in the category of “spending money to make money,” can become a significant drain on the business’s profitability.
Types of Costs
Variable cost: A cost that changes, in total dollar amount, with the change in the level of activity is called variable cost. A common example of variable cost is direct materials cost. Consider the following example to understand how variable cost behaves in a manufacturing company.
Fixed cost: A cost that does not change, in total, with the change in activity is called fixed cost. A common example of fixed cost is rent. In above example, if mobile phone manufacturing company rents a building for its factory for $5,000 per month, it will have to pay $5,000 for every month even no mobile phone is produced during the month.
Mixed or semi-variable cost: A cost that has the characteristics of both variable and fixed cost is called mixed or semi-variable cost. For example, the rental charges of a machine might include $500 per month plus $5 per hour of use. The $500 per month is a fixed cost and $5 per hour is a variable cost. Another example of mixed or semi-variable cost is electricity bill. The electricity bill can be divided into two parts – (1) line rent and (2) cost of units consumed. The line rent is not affected by the consumption of electricity whereas the cost of units consumed varies with the change in units consumed
Now what you have been waiting for, the tips on saving money spend on fixed overheads in driving schools:
Identify Cost Savings Opportunities
Ask your accountant or bookeeper to provide you with your business' most current list of overhead costs. If you don’t employ an accountant, conduct a search via your bookkeeping software that can pull these costs for you. If you having difficulty in doing this, contact the software developer or do some research on Google. Remember that overhead costs can be variable or fixed and paid on a regular basis (e.g. monthly, quarterly or annually). You are mostsly interested in those costs that are incurred on a monthly basis irrespective of sales volumes.
Once you have extracted the information you need, scrutinise this list to identify costs that are –
No longer necessary, Too high in price, Open to efficiencies, Not providing you with enough value, Not related to the business, more enetertainment in nature (IE: Cable Subscriptions)
Be careful not to cut to many costs as this might have an adverse effect on your business and might do more damage in the long run. The key is to take small steps on this first tip.
Don’t Look for a White Elephant
If you have conducted cost-savings exercises before, there’s little chance that reducing or eliminating one line item is going to solve all the problems. You might realize that cutting a number of smaller costs will add up to a significant saving over time.
Interest rates are unusually low at this time. If you have any long-term debt on equipment, machinery, or real estate, now is the time to refinance with the goal of reducing payments as much as possible for the near term. In hard times, cash is king, so you want to keep as much as possible close at hand for emergencies.
Eliminate Subscriptions and Memberships
Over time, many companies add subscriptions and memberships due to their industry and the small expense involved for a single affiliation. These expenses can rapidly build up and go unnoticed, however, as they often appear on different schedules and expense reports. Review all your social, fraternal, and business affiliations to ensure they are necessary and contribute regularly to the profitable operation of your company. Eliminate those which do not.
Cut Travel Costs
Where possible, eliminate travel, replacing the trips with phone calls, emails, and video meetings. If you must fly, plan ahead to avoid the high costs of a “sudden” trip. Increase the scrutiny of your expense accounts to send a clear message to your staff that costs are important.
Brainstorm With Your Employees
If you have a staff, ask them for their input on where money can be saved. Depending on the size of your driving school, you might even want to offer incentives for the idea that saves the most, the idea that is the most innovative, etc. This type of collaboration often leads to more opportunities than you could find on your own, either via research or otherwise. You could even offer financial incentives as a % of money saved.
Reevaluate all current Contracts
If you rent equipment or pay service retainer fees, then you might be able to find cost savings by evaluating your current contracts to see if they still fit your needs. This is especially important if the contracts are older. Chances are your business has changed since you first signed it, so taking a closer look is warranted. This analysis may not always result in decreasing the contract cost. You may have outgrown your original contract, but you may also be spending more to fill service gaps yourself instead of asking the vendor to do it for you. So while you might see an increase in the contract amount, you will see a decrease in other columns of your ledger.
Clear Out Your Storeroom
There’s a chance that your storage room or empty office space is filled with non-working or outdated technology, including older computers, printers, fax machines and phones. Clear it out, and sell it. Look for buyers in your area. If the machines are in good working order and no longer needed, consider donating them to a charity or a school. Just make sure to get a receipt so you can write them off on your taxes at the end of the year.
Assess Your Staff Numbers
Chances are there are one or two members of your team that are under performing and have been for a while. Laying someone off hurts, but keeping an underachieving employee on staff doesn’t do anyone any good. It’s a drain on your resources and employee morale. It also doesn’t give the employee a chance to find something new or different that might be better suited to his or her skills.
Managing paper is time-consuming and expensive. Sorting, filing, and finding files requires secretarial/clerical time and space. Purchase a scanner and digitize all important papers and keep them in well-organized electronic files to save space and administrative costs. Your company’s books and records are critical to your continued operation, so it is important to maintain and secure copies of the electronic files within your facility and in a remote location. It should go without saying that files need to be backed up every day, especially any files regarding your customers’ identification, financial records, or contact information.
Share Marketing Expenses
Identify products or services which complement your product. Then, contact the company that provides the products and negotiate a mutual marketing arrangement. For example, a swimming pool contractor might agree to joint marketing with a supplier of outdoor furniture, or multiple ethnic restaurants could promote an “International Food Experience” featuring each restaurant on a different night. This strategy expands your marketing effort without incurring the expense that would normally be associated with adding new salesmen or advertising.
Maintain Equipment In-House
If repair and maintenance is a significant cost in your operations, consider hiring a mechanic or specialist and bring the repair in-house. You will have better, regularly maintained equipment that may allow you to avoid expensive replacements until later.
Leverage Your Current Client Base to Save on Promotion
Even in the digital age, word-of-mouth is still one of the best forms of referral. Scale back your advertising and marketing budget
by using your current, happy customers as brand ambassadors. Here are a couple ways to do it:
Offer an incentive (i.e. restaurant gift cards, percentage off future services, premium items, etc.) to clients who refer others to your business. These incentives do not have to be pricey, but they should be valuable.
Ask for testimonials, and use them. Ask current clients for a one- or two-sentence testimonial, then use it on your website, email newsletters or any advertising. If appropriate, ask them to post a positive review on Yelp or another social platform such as Facebook or Twitter.
While you may not be able to completely eliminate paper from your business, you can probably greatly reduce the amount of paper you use, which will allow you to save on printers, ink/toner, paper and storage space. Back up all of your documents to the cloud or on a drive, then shred any unnecessary files. You can then sell the filing cabinets that held them and pocket a little extra cash.
Use Credit Cards That Work for You
As a business owner, you probably have at least one credit card for business expenses. Make sure that you’re using a card that gives you the most benefits, including miles or points for travel, cash back or other rewards. Even if you don’t issue company credit cards to all of your employees, the amount of money you can save on your own travel expenses by redeeming points can often lead to significant savings.
You can also evaluate your cards based on annual fees and interest rates. Make sure the card you use is designed for small business and not just consumers. Companies service each group a little differently.
If possible, designate one person in your organization to handle all purchasing, including negotiating contracts for telecommunications services, placing office-supply orders and more. This person should be very good at negotiation and not afraid to ask for concessions, such as, “If we pay the total balance in eight months instead of 12, can we get a 3% discount?”
Also, by making purchasing their job, it will allow them the time to look for the best prices and bargains. When purchasing tasks aren't a primary job function, the employee may want to just get it done quickly so he or she can focus on other tasks. This often results in placing orders with a familiar vendor and not shopping around for the best offer.
Sublease Your Office Space
If you own your office space, you might find there are a group of rooms—or even floors of a building—that you don’t use. Sublease this space to other small businesses, and use the rent to subsidize your own payments.
Consider How Much Space You Really Need
Depending on your organization’s size, it might be time to give up your office space and move to a telecommuting model. Or it might just be time to move. Maybe you don’t need an office in the middle of downtown, which often comes with a higher price tag.
Consider what you use your office for, how often you’re there and why you have it in the first place. If you feel you still need an office, consider downsizing or look into office rental situations that allow you to maintain a professional space for a fraction of the cost.
However you decide to cut overhead costs, the process will be ongoing, and results will not be instantaneous. You will need to carefully evaluate your current situation in order to determine the most efficient way to generate savings. And unless you immediately jettison a few employees or cancel a bunch of contracts, your cost-saving endeavors will be an ongoing exercise.
Keeping costs down should be a year-round effort, but there should be a method to your cost-cutting. Learn more about where not to cut corners when it comes to your
Don’t Purchase – Rent
The decision whether to own or rent property is generally based upon your scale of operations. Ownership or long-term leases increase your fixed costs and financial exposure. While month-to-month rental agreements tend to cost a little more in the short-term, the ability to end the agreement and relocate to a more suitable space saves money and liability in the long run. In a fluctuating market, a wiser decision might be to limit your financial exposure, saving your cash for that time when you’re more comfortable with the market opportunities and an investment that will meet your criteria.
Limit Travel and Entertainment Expenses
Client relations is always important and should never be compromised. However, the value of face-to-face meetings is not a function of lavish gifts and expensive dinners at luxury restaurants. Establish an entertainment policy which fits the economy; your clients and prospects will understand since their company is probably implementing similar policies.
Technology effectively reduces distance, so there is no need to require administrative people or specialists to be physically located together. Employees who work from home or in month-to-month temporary facilities reduce or eliminate the high cost of office space, as well as the demand for support services. In many cases, employees with the opportunity to telecommute will take less salary due to the freedom and lack of commuting costs.
Sublease Office and Yard
If you have excess space that will not be used for a year or more, investigate subleasing. As a landlord, you will continue to control the premises and the activities performed in the space, and you’ll have extra income to offset the expense of your own facilities.
Before agreeing to a sublet, you should be confident that the space will not be needed during the term of the agreement. Include language in the contract for early termination if it becomes necessary. Your ability to reoccupy the space provides maximum flexibility, and can be reflected in the agreement by either reducing the tenant’s rent during the term of the agreement or paying a penalty if termination becomes necessary.
When you travel, stay in business hotels, rather than luxury hotels, as they are often half the cost of a four-star facility. And everyone who travels should be members of the affinity group sponsored by that hotel to gain discounts and free nights.
Furthermore, focus your car rental on a single supplier with whom you’ve negotiated a bargain rate – specify standard models except in approved instances. If staying in a larger city, consider the use of taxis instead of renting a car. Discontinue private limousine services unless they’re comparable to taxi rates.
Use Airline Miles for Travel, Hotels, and Autos
If you or your employees fly regularly, target a single airline with a good travel rewards program for company use. Also sign up for one of the best small business credit cards, and as the points or miles build up, use the awards for company business.
Monitor Tools and Supplies
Consumables are an invisible asset that is often overlooked. Since no item is expensive by itself, employees often misplace them, leave them, or take them home for personal use. Initiate a consumables policy – keep office supplies in a secure area, available only through a designated employee. If you have a plant where hand tools or other pricy consumables are used, initiate a similar policy. Assign tools to individuals with the requirement that they are personally responsible for the cost of the tool if it’s lost or missing.
Leverage the Internet
Everyone involved in the purchase of materials or supplies should have access to the Internet and know how to search the data for specific items. Establish a maximum cost per item with a policy that requires anyone purchasing items in excess of that value to use the Internet to identify potential suppliers and the lowest cost.
Leading business consultants around the world generally agree that most companies can cut fixed overheads and other administrative expenses by up to 10% without affecting their operational efficiency. If your looking for additional ideas on how to cut your costs, please contact us at firstname.lastname@example.org and we would be glad to give you additional ideas.