Running out of cash is a common cause of small business failures, but it doesn’t happen all of a sudden. It’s really a symptom of underlying problems that weren’t corrected quickly enough to put the business on a sound footing.
Paying attention to finances has to start before you open for business on day one. While the prospect of doing this doesn’t excite many entrepreneurs, failure to do so greatly reduces your chances of success.
Controlling expenses is just as important as generating sales. All the sales in the world won’t yield a profit if your spending exceeds a sustainable rate. Here are some ideas on how to monitor and manage the way you spend your money.
What Are Overhead Costs in a Handmade Business?
Overhead costs refer to the ongoing expenses required to run your business—but not directly tied to making a specific product. These might include rent, utilities, internet, packaging supplies, software subscriptions, or even insurance.
Understanding what overhead costs are in your business helps you separate production costs (like raw materials) from operational ones. For example, if you make candles, the wax and fragrance oils are product costs, while the electricity to melt wax, your studio space, and your website fees are overhead expenses.
There are two main types of overheads to track:
- Fixed overheads: Costs that remain constant regardless of how much you produce (e.g., rent, web hosting).
- Variable overheads: Costs that fluctuate based on your production or sales (e.g., shipping supplies, credit card fees).
Identifying these categories will help you make more strategic financial decisions.
How to Identify and Track Overhead Expenses
To get a handle on your overhead, begin by reviewing your past few months of spending. Identify any recurring payments that aren’t directly tied to making your products—this includes expenses like your workspace, utilities, internet, website hosting, and business software.
Once you’ve gathered a list of these operating costs, categorize them as either fixed (those that stay consistent, like rent or web hosting) or variable (those that shift depending on sales, like shipping supplies or credit card fees). This distinction helps you recognize which expenses you can potentially reduce and which are non-negotiable.
Even a basic spreadsheet can be a powerful tool for tracking. Logging each expense monthly will help you spot patterns and evaluate whether your current setup is sustainable. If you’re not already tracking these details, starting now can be a turning point in your ability to make smarter financial decisions for your business.
Practical Tips to Reduce Business Overheads
Learning how to reduce overhead costs doesn’t mean sacrificing quality. It’s about working smarter with the resources you already have. Here are practical, budget-conscious ways to reduce business overheads:
- Downsize or share space: If renting a studio, consider moving to a smaller area or sharing the space with another maker.
- Negotiate with vendors: Ask suppliers about bulk discounts or lower shipping rates.
- Batch shipping: Consolidate orders to save on postage and time.
- Revisit subscriptions: Cancel unused software, apps, or services.
- Repurpose packaging: Reuse boxes or purchase eco-friendly options in bulk for better savings.
- Use free marketing channels: Social media and email marketing offer high ROI without additional cost.
These small shifts can lead to significant savings over time.
