Navigating the Rise in Business Overheads

Cost reduction ideas
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The economy is taking its toll on everyone. Business more so, and each of their employees. The rising cost of living, the introduction of the National Living Wage, the cost of fuel, energy, and the majority of the costs for raw material supplies.  

With every increase in business overheads, profit margins dwindle. The key to staying afloat in a competitive economy is knowing your overheads, making cuts strategically and where the need exists, engaging with your workforce.  

3 tactical approaches to manage increasing business overheads 

Increase revenue by renting commercial real estate or negotiating rates 

If you’re lucky enough to own your premises, consider leasing a spare office or if it’s possible to locate all your offices on one floor (freeing up an entire floor) there’s more commercial space available to lease. Consult with a commercial real estate agent for advice 

For businesses leasing commercial premises, consult with the landlord or their managing agent. Lease rates can be negotiated, however, if you are paying for more space than you need to operate, it would make sense to negotiate the lease terms for only the space you need.  

Should negotiations fail, the alternative option is to explore available leases for commercial space that fits your needs. Not too much, nor too little. And in a location suitable for your business. As an example, a retailer would benefit from a high street location. A recruitment agency, not so much. Rates are cheaper on the outskirts of towns and cities.  

Collective Redundancy and Negotiating Pay Cuts 

Collective redundancy is the term used for when twenty or more employees are made redundant within a 90-day period. More recently, it has emerged as part of a fire-and-rehire strategy to cut the salary costs of employees. Under UK employment law, this is illegal and staff made redundant without consultation have grounds to take the employer to an Employment Tribunal, and likely win their case if the proper procedures were not followed.  

A more subtle approach to deal with increasing staffing costs is to engage with your workforce. For businesses that have been around for years with pay increases linked to years in service, the fire-and-rehire strategy is a controversial practice that rarely ends well.  

A strategic approach for managing workforce pay cuts is to lead from the top. Start with board members and management. Employees are more likely to agree to a different employment contract when they know the cuts are applied at the Director level, such as a suspension of dividend payments and performance bonuses.  

If possible, look at reducing hours rather than cutting pay. Typically, when a business reaches a stage that it struggles to pay staff wages, it’s because the volume of work has decreased. Rather than reduce the pay for the same number of hours, it may make more operational sense to cut the hours in line with demand.  

Consider a Company Voluntary Agreement (CVA) 

A CVA is a temporary rescue plan to revive a business struggling to meet its debts. It is a complex legal process done to ensure suppliers and creditors are paid an affordable amount that doesn’t cripple a business in the short term. The purpose is to allow some breathing space while the company undergoes restructuring.  

Insolvency regulations were relaxed for a period in 2020 to allow business directors more flexibility to seek a solution before resorting to insolvency. A number of business processes can be explored before a business reaches a stage where liquidation is the only option.  

Should your overheads be crippling your profit margins, The Hughes Partnership are specialists in insolvency. We can talk with you about all the available options, the cost advantages, implications and everything involved in each step of the process. 

Pricing increases is the logical first step to meet increasing overheads, however, depending on your industry, the risk is existing customers finding a cheaper solution from competitors. The strategic approach is to start with your internal accounts, review existing financial obligations, make necessary and strategic cuts to bring business overheads to the absolute minimum that leaves your business profitable. Even reaching a break-even point buys time to focus on expansion. The key is knowing when the business is not profitable and getting ahead of things before debts spiral to crippling amounts.  

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