Overhead Costs and Post-Pandemic Planning

As we emerge from the pandemic and begin to find new ways of operating in the world, businesses are debating whether to bring employees back to the office, have them stay remote or develop a hybrid model. The decision will impact many areas of the business.

As business leaders make this challenging decision, they will find themselves reassessing their overhead costs. Overhead costs are ongoing business expenses not directly attributable to a specific product or service. The price a company charges for a product or service is, in part, determined by the amount of its overhead.

Businesses’ expenses fall into three major categories: fixed, variable and discretionary. Fixed expenses are overhead costs that are incurred regardless of whether a product or service is produced, such as rent and mortgage payments, utilities, insurance, and property taxes. They do not fluctuate with business activity. For example, businesses such as restaurants, which were largely shuttered during the pandemic, had to pay their fixed costs even when their businesses were closed.

Variable expenses, which are not considered part of the overhead costs, are expenses incurred in making goods. For a restaurant, that’s the food and labor that they weren’t paying for when the business was shuttered. The last type of expense, and the other part of overhead costs, is a discretionary expense, or spending on things that the owner doesn’t need in order to stay open: décor, advertising, live music, and all the other wonderful things we used to enjoy that fell by the wayside during the lockdown. So as businesses shut down operations and pared their spending down to the bone, fixed expenses stood alone, and owners may well wonder how they can cut expenses even further.

As companies review their overhead costs, they may realize they can significantly reduce them.

  1. Rent is arguably the business’s largest overhead cost. Here are three things you can do to help alleviate the burden:
    1. Does your lease agreement have a “force majeure” clause? This clause is intended to provide relief when an event occurs that cannot be reasonably anticipated. You may be able to argue that it applies to a pandemic lockdown.
    2. A rent reduction or rent abatement is another way to get relief.
      • A rent reduction reduces your rent for the remainder of your lease.
      • A full or partial rent abatement allows you to not pay all or part of your rent for a set period of time. After that period ends, the amount that was abated must be repaid, sometimes with interest.
    3. Subletting all or part of your business’s physical space to another business.
    4. If your lease is due for renewal, you may be able to negotiate a lease with more favorable terms. Before you do, be sure to research local trends to discover typical rents and lease provisions in your area.
  2. Energy audit. Performing an energy audit can help reduce utility costs. For example, using energy-efficient lightbulbs and smart timers can reduce costs.
  3. Office expense audit. Chances are your office supply costs have gone down. If some or all of the workers who used to come into your office worked from home during the lockdown, you probably stopped offering free coffee and purchasing fresh flowers for the reception area. Which of these costs can be permanently lowered or eliminated without impacting company culture?

Any decisions company leaders make during this assessment need to be strategic. Short-term fixes inevitably have long-term repercussions. Giving up a lease in a prime business area may be the right decision today, but it may not be the best decision for a business that expects most employees to be back at the office in a year.

Additional Resources

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