Table of Contents
- 1 What is Overhead Cost?
- 2 Types of Overhead Cost
- 3 Example of overhead cost in ecommerce business
- 4 How can you predict E-Commerce overhead costs and set the budget accordingly?
- 5 How do you reduce the overhead costs of an eCommerce business?
- 5.1 1. Track your expenses.
- 5.2 2. Recheck your packaging to see whether it’s effective enough.
- 5.3 3. Check your shipping system & price.
- 5.4 4. Make sure to check your inventory more frequently.
- 5.5 5. Maintain and eliminate: Top performing products and remove any unnecessary products.
- 5.6 6. Invest your money into the right place
- 5.7 7. Forget quantity; focus on quality.
- 6 Conclusion
What is Overhead Cost?
Overhead is the term used to describe continuing business costs that are not directly related to the development of an item or service. Therefore, it is crucial to budget for and determine what a company has to charge for its goods or services to turn the revenue. In essence, overhead refers to any cost incurred to help the business but is not directly linked to a particular item or service.
Types of Overhead Cost
Overhead expenses typically fall into three categories: fixed, semi-variable, and variable.
- Fixed cost: Fixed and continuous costs that do not change with time. They could comprise administrative salaries, rent, insurance, or everything else with an established price. The most important thing to consider regarding fixed overhead costs is that they are the same each month.
- Semi-variable costs Semi-variable costs are costs that remain constant but can fluctuate in the amount they cost. Typically, semi-variable expenses have fixed amounts, and the variable is activated whenever the amount is greater than the amount fixed in dollars. For example, utilities could be higher for retailers in the holiday season when they’re open longer hours and need to operate HVAC systems. Other expenses, such as advertising, can also vary according to the chosen marketing strategy.
- Variable Costs: Variable overhead costs are costs in which there isn’t a fixed dollar value, and the cost isn’t always the same. For example, companies that are only producing during specific months of the year could think of these costs as being to be variable. Even if the lawyer is not retained, legal costs would be considered a variable expense. Smaller companies that only require monthly accounting services would see it as a variable expense.
A case study of the overhead costs associated with e-commerce
Physical retailers are subject to overheads, such as leasing shop space, employing employees, and paying for utilities. E-commerce stores can reduce costs that physical counterparts have to contend with. However, it doesn’t mean they’re immune from these costs completely.
Example of overhead cost in ecommerce business
Operations costs cover elements such as shipping, delivery costs, and marketing. However, the overheads for your online business will include items like:
- Fees for licenses
- Transaction fees
- Maintenance and support
- Office equipment
- Advertising costs
- Legal and accounting expenses
How can you predict E-Commerce overhead costs and set the budget accordingly?
It’s hard to reduce expenses if you aren’t paying close attention to how much you are spending. Unfortunately, this is what often occurs. These costs quickly increase without businesses even noticing.
To help you begin for success, first estimate your expenses.
Here’s how you can get started:
1. List all your business’ overhead costs
They include rent and utilities, software, salary, and any other costs you have to pay, regardless of whether you’re creating or selling something.
2. Divide these into fixed, variable, and semi-variable costs
After you’ve got a solid grasp of the total cost of your overheads, It’s time to break them down into three categories: fixed, variable, and semi-variable.
This is an important step to understanding the things you can cut down on and which you cannot.
For example, if you have a website for your business, you can be charged a specific annual or fixed monthly web hosting cost.
However, the costs, like an electric bill, are contingent on the activities of your business between months.
3. Understand your problem areas
It’s usually not a major transaction, but the smaller, less obvious costs can hurt your return on investment.
Knowing where each cent goes makes it easy to identify what needs to be addressed.
Check out expenses you do not require, such as software or storage. Look for areas where you could be reduced without affecting your budget, such as the cheapest but reliable hosting service.
4. Create a budget
Making budgets are an important aspect of any business. This will help you understand each expense your company has to pay and the areas where you can reduce your expenses.
When you’ve created your budget, break down your expenses into various categories (fixed or variable, as well as semi-variable) to make you aware of the specific expenses.
Consider your annual expenses associated with e-commerce rather than considering them on an annual basis since this will give you more clarity on the larger picture.
How do you reduce the overhead costs of an eCommerce business?
1. Track your expenses.
It is easy to view small expenses as minor, but they could add up over the time of the calendar year, or even more. In the longer term, they will significantly impact the bottom line. Therefore, it is vital to monitor every expense as soon as possible.
You might not have an accounting staff if you’re an individual proprietor or a small business just starting its online business. As a result, you might not be able to justify an extra cost for any service you utilize by using spreadsheets or simple software for business that allows you to easily keep track of each expense and possibly determine trends or expenses that could reduce or eliminate.
2. Recheck your packaging to see whether it’s effective enough.
In the beginning, many companies selling online choose to use the most basic and affordable packaging solution at the moment; however, this might not translate into real savings over a long time. Utilizing large boxes or excessive packing materials (to allow for a smaller product in the box that is too big) could result in substantial additional monthly costs.
3. Check your shipping system & price.
Outsourcing the delivery of your goods could result in a substantial cost, particularly if you provide free shipping. Keep in mind that the market for third-party logistics is massive and estimated to be $196.4bn by 2021. Find the best courier service that matches the needs of you as well as your customers, and remember that the cheapest option is not always the most efficient.
If you’re offering free shipping to your customers as an incentive, make sure that the expenses you’re taking on will not negatively impact your return on investment as well as other KPIs. In addition, don’t limit your business to one logistics provider, especially if you are shipping internationally and nationally. One company may be the best for both national and local deliveries, while another could be more suitable for international shipping.
4. Make sure to check your inventory more frequently.
It’s essential to check the levels of your inventory carefully. This isn’t just an issue of being aware of actual demand but also of your forecasting demand and any seasonal changes. It is not worth stocking up on Xmas items when it’s just February. Prepare well and think ahead.
Flexibility in planning can be essential for your business and is essential in the area of planning and controlling inventory. First, examine your previous information and forecasts for each item’s projected need for inventory.
5. Maintain and eliminate: Top performing products and remove any unnecessary products.
The preferences and habits of the consumer shift with time. Your most-seller product in the past year may quickly be your surplus inventory in the next. A crucial aspect of effective inventory management is carrying the ABC assessment. This will allow you to determine the most effective products for your business and which products are put on the shelves.
6. Invest your money into the right place
Everyone wants new business however, your primary focus should be on keeping your existing customers as well as increasing your CLV (customer lifetime value). It could be as high as four times more cost-effective to market to existing customers as to bring on new ones. This is more ROI when you focus on the retention of your customers.
Marketing to existing customers can be less costly and easier also. They’re already signed up with you and will be receiving notifications through SMS and emails, which include messages such as promotions and loyalty rewards. It’s best to send a periodic newsletter to these customers to let them know what’s happening on your website as well as any new promotions.
7. Forget quantity; focus on quality.
This ABC analysis we mentioned will help you concentrate on the top-quality products you sell. It determines which ones bring in the most money and, in turn, that they are the ones the customers are most satisfied with. The assessment of your online business is not based on the size of your selection of goods is, but rather depends on how great they are and what customers say about them.
It’s almost impossible to operate an enterprise without incurring overhead costs. This is especially true when you’re making your own products. The expenses of infrastructure, warehouses utility bills, wages, and other expenses are a quick way to eat into the profits you earn.
Thus, learning how to budget your expenses for overheads is a crucial aspect of establishing and running an effective business. It’s your responsibility as a business owner to reduce your expenses in order to increase the profits you earn. This is about streamlining your operational expenses so that you’re not spending more than what is necessary.