Too Much Overhead: A Common Small Business Blunder

Those of you who endeavor to start a small business will likely face a number of financial difficulties at the outset, from securing loans to get you off the ground to enticing investors to help keep your operation up and running until it sees a profit. You may underestimate your expenses and overestimate your profits (in other words, you’re likely to suffer from faulty forecasting). And of course, there will be unexpected costs that pop up here and there to throw a wrench in the works. But one area that is 100% within your control is your overhead. And yet, this is an area where many novice small-business owners have issues. However, if you understand what constitutes overhead, how to control it, and where to make cuts, you’re going to find yourself in a lot less trouble if your ship doesn’t come sailing in as soon as you predict.

The term “overhead” can be used to cover several areas of expense when it comes to small business operations. It may include the costs associated with running a brick and mortar operation (such as a lease, staff, supplies, equipment, and so on) as well as production expenses (like renovations, insurance, and utilities). It could also include outside vendor services such as armored cars or other deliveries. Or if you run an online store, it might pertain to the cost of maintaining a domain and website (along with related costs for web services to run an online store, host a blog, or engage an SEO specialist). In short, it is comprised of the everyday expenses required to run your business that are more or less known at the outset.

Where most small businesses get into trouble with their overhead is that they have far more than they need or can really afford. A prime location is smart for a business that relies on foot traffic, but you need to set a budget for monthly expenses and secure a lease that is appropriate (remember, the size of your shop makes a difference, too…additional square footage means increased costs for heating and cooling). The same goes for staff. Until you get your business off the ground, you may have to resign yourself to working with a skeleton crew that can multitask. And you probably don’t need the latest and greatest computer equipment unless you’re starting some kind of tech company. Of course, once your business starts to grow, you will likely have the money needed to cover expansion, upgrades, and the related bump in overhead, but until then, you really need to think like a minimalist.

Experience will teach you how to spend wisely, but for a small business owner just starting out, the steep learning curve can quickly drag you out of your depth and leave you struggling to stay afloat. So if you’re not sure how to handle overhead conservatively, consider employing the services of a financial planner. You’ll spend a little of your seed money up front, but accounting for what you stand to save by carefully planning your overhead and having a solid budget in place, it will surely be money well spent.