Running a business demands spending money just as it requires making it. Overhead costs, which land squarely in the “spend money to make money” category, can have a significant impact on an organization’s bottom line. When you find that overhead, or indirect costs, are taking too big a chunk out of your earnings, it might be time to reevaluate your costs and lower them if possible. When you take the following 15 steps, lowering your overhead costs becomes more likely.
A 15 Step Guide to Lower Overhead Costs
Running a law firm demands spending money just as it requires making it. Overhead costs, which land squarely in the “spend money to make money” category, can have a significant impact on an organization’s bottom line. When you find that overhead, or indirect costs, are taking too big a chunk out of your earnings, it might be time to reevaluate your costs and lower them if possible. When you take the following 15 steps, lowering your overhead costs becomes more likely.
- Review all overhead costs.
Ask your accountant for a list of your law firm’s overhead costs and review each item on the list to understand the types of costs you incur and the dollar amount of each. As you examine the list, note the items with dollar amounts that appear too high, the entries for what seem to be unnecessary expenses and the expenditures you might lower by taking particular actions. For instance, a change in policy, a revised work process or sourcing an item from a different vendor can reduce your overhead costs.
- Ask your staff for input.
If your law firm has a staff, ask each employee for ideas about how he might change his work processes to be more efficient, which will lower costs. To pique their interest, you might offer a cash prize or other incentive to the employee whose suggestion saves the most money.
- Reexamine third-party contracts.
It’s likely your law firm rents equipment or to other service provider. If so, look over current contracts to confirm they meet your requirements. Also, do some research to verify the service prices are competitive. For instance, an existing vendor may provide a service you require at a price that’s much less than the cost of performing the function in-house.
- Donate or sell excess equipment.
If you’re storing outdated or non-functioning computers, printers, phones or other equipment, sell them or donate them and put your storage space to better use. By doing so, you’ll free up some cash to use in more productive ways.
- Assess each staff member’s performance.
It’s likely the performance of one of your team members has been lacking for some time. If so, consider discharging him. By doing so, you’ll decrease your overhead costs and the employee’s absence may improve staff morale, which improves employee efficiency and lowers costs.
- Limit the duration of all procurement contracts.
Multi-year contracts may grant you price discounts. But a discount may be offset by additional costs, such as an early contract termination penalty or higher material costs due to the inability to negotiate a best price for each order you place. Also, you impose pressure on a vendor to offer you a high-quality services at a reasonable price if you can make your next purchase from a number of different suppliers. This fact runs contrary to multi-year contracts.
- Involve clients in your strategic planning processes.
Discussions with patrons may help you identify ways you might grow your client base and revenues, and simultaneously decrease your cash flow risk. For instance, clients might have ideas about how you can improve your service.
- Decrease the number of employees on staff.
While measuring the returns on invested capital is important, the contributions made by your people and the efficiency with which they work is critical to lowering your overhead.
You can increase the efficiency of your personnel, which is reflected in revenue-per-employee, with a number of measures. For instance, technology and lean techniques allow each employee to accomplish more in less time.
- Decrease marketing and sales costs by leveraging your client base.
Offline and online client recommendations are no- or low-cost ways to market your services, and expand your client base and sales volume. By loyal clients acting as brand ambassadors, you might cut back your advertising and marketing costs.
- Minimize paper usage.
It’s improbable that you can completely eliminate your law firm’s use of paper. But it’s likely you can reduce its usage, as well as the number of printers and the amount of ink/toner you must purchase. For instance, you might convert essential paper documents to electronic files you store in the cloud or on a drive, and destroy the printed records. By doing so, you’ll require fewer filing cabinets, less document storage space, and a smaller amount of floor space for the equipment.
- Use credit cards with terms that suit your law firm.
Most law firm owners have one or more credit cards for law firm expenses. Before you apply for a particular card, consider those designed for small law firm use and read the card terms carefully. Make application to the issuer that grants you the most beneficial terms, such as cash back or travel miles, each of which is a cash savings.
- Choose one employee to handle purchasing.
If an employee’s primary responsibility is to handle vendor contract negotiations and placing sales orders, it’s likely he’ll identify good sources of needed materials. Also, it’s more probable he’ll ask for good payment terms and other concessions.
- Sublease unused office space.
Included in your office space may be a few rooms or possibly an entire floor of a building that your law firm doesn’t use. You can sublease this space to another law firm, which effectively lowers your law firm’s rent.
- Use just-in-time trading to reduce inventory carrying costs.
Often, companies purchase large quantities of inventory that they store in a warehouse until clients buy it or manufacturing processes convert it to finished goods. But when inventory sits in a warehouse before it’s sold, you increase your costs, decrease the cash that’s available to meet obligations or pursue new opportunities and increase your cash flow risk. Instead, you can reduce carrying costs and cash flow risk by using just-in-time inventory to ensure suppliers maintain ownership of the inventory until such time as it is needed.
- Evaluate the feasibility of your current office space.
If possible, relocate your law firm from a leased office space to an area of your home. At a minimum, you might move from one office space to a different, less expensive location. For instance, an office in a suburban area is often less expensive than one in a downtown area.
Your efforts to slash overhead costs should be ongoing. Review each cost in terms of its necessity to law firm operations, its dollar amount and the existence of an alternative process or asset that might be more effective in an operations or financial sense. Because each reduction in costs leads to an increase in cash flow and income, and the long-term value of your law firm, it’s a project worth pursuing.
– Billie Nordmeyer