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Overhead Cost Reduction In Cannabis Operations

overhead cost reduction in Cannabis Operations

If you own a cannabis business, you're already at a disadvantage due to restrictive tax regulations in the United States that don't allow you to deduct common business expenses when calculating your taxable income. In response to this, most cannabis operations look for ways to increase their profit by lowering other business expenses. This includes achieving cost savings by managing and reducing overhead expenses.


Many small business owners reduce overhead costs for financial stability. Additionally, lower overheard expenses mean you can allocate funds to value-adding initiatives and worthy investments. You'd be surprised by the money you can save on day-to-day operations when you evaluate your overhead costs and strategize ways to lower these expenses without compromising the efficiency of your business operations.


What Are Overhead Costs?


office workspace

Overhead expenses refer to the costs a business incurs to keep the business running. These are costs of necessary functions that are not directly tied to the product or service. Overhead costs include rental costs, administrative salaries, external services expenses, facility maintenance and repair, insurance payments, utility costs, office equipment, office supplies, and software subscriptions. To cut costs and reduce expenses, businesses aim to keep their total overhead cost as low as possible.


Different Types of Overhead Costs


employer and employee discussing salary and benefits

Fixed Overhead Costs

Fixed overhead costs refer to expenses that come at fixed amounts. This means that regardless of your business's sales volume or cash flows, you'll still pay the same price regularly over a specific amount of time.

These costs include:

  • Rent or lease expenses

  • Administrative costs, such as salaries and benefits

  • Insurance payments


Variable Overhead Costs


close-up of a lighted light bulb

Expenses that change and adjust based on your business's sales, production levels, and activities are called variable overhead costs.


For example:


  •  Utility bills

  • Packaging materials or supplies

  • Maintenance expenses

  • Repair costs

  • Indirect labor costs (temporary or seasonal workers' compensation)


Semi-Variable Overhead Costs

Semi-variable overhead expenses refer to costs that have both a fixed and variable component. A portion of these expenses are always constant, but there are also variable costs based on production and operation factors.


Semi-variable overhead costs include:


  • Additional utility expenses: Basic utility expenses may be fixed, but there can be increased utility expenses due to increased production or intensity.

  • Overtime payments: While the base pay for your employees is fixed, overtime may be required for busier production periods or peak seasons, leading to additional costs in the form of overtime payments.

  • Equipment maintenance and repair costs: On top of regular maintenance and repair fees, increased production can lead to additional costs in maintaining and repairing equipment.


Administrative Overhead Costs


employees in a meeting room

Administrative overhead costs are expenses related to general business, project management, and administrative tasks. While these aren't considered direct costs, they are essential in the grand scheme of business operations.


Administrative overhead costs include:


  •  Professional fees: Legal expenses, consulting costs, and accounting fees necessary for compliance

  • Office supplies and Office equipment: Money spent on administrative tools and materials

  • Wages and employee perks for administrative staff: This includes expenses for employees who are not part of the production staff, including office personnel, human resources, and executives.

  • Rent or lease for physical office space: Rent costs for office space not used for production.


Production Overhead Costs

Production overhead costs (or manufacturing overhead costs) are indirect costs associated with the production of a business's product.


Production overhead costs include:


  • Utility bills

  • Maintenance and repairs

  • Indirect labor costs

  • Equipment depreciation

  • Property taxes


Marketing and Selling Overhead Costs


advertisements

The overall indirect cost incurred by marketing and selling a product or service is called marketing and selling overhead costs.


Examples include:


  • Advertising and promotion expenses

  • Sales and marketing staff wages

  • Sales commissions

  • Travel expenses

  • Brand development costs


Research and Development Overhead Costs

These are expenses related to innovation, product development, and general compliance with legal considerations. Businesses allocate funds for research and development to further improve their product or service.


Some examples are:


  • Laboratory testing

  • Compliance testing

  • Quality control

  • Product development

  • Regulatory affairs


How to Reduce Overhead Costs


employees speaking with each other during a meeting

There are various types of overhead costs and they are all essential to keep your business afloat. Whether you're a big or small business owner, you'll save money when you consider making changes in the following areas to reduce costs:


Streamline Your Workflow

Make your processes and workflow more efficient to reduce overhead costs. This involves standardizing procedures, cross-training staff, identifying (and improving) inefficient stages in the workflow, and enhancing your overall processes. Doing so can help reduce indirect costs and even your operating costs.


Transition to Digital and Cloud-Based Solutions

You can save on office supplies and paper usage by transitioning to digital and cloud-based software. Doing so will eliminate the need for manual processes and physical infrastructure (along with its maintenance and repair). This will also take up less storage space and increase efficiency as your business grows.


Outsource Non-Core Functions

Reduce overhead expenses by outsourcing your business's non-core functions such as payroll processing, IT services, and customer support. Instead of hiring new employees, outsourcing talents is cost-effective because it allows business owners to hire specialists without the overhead costs typically associated with in-house employees.


Consolidate Work Space and Improve Layout

Office space rent is a major expense for a lot of businesses. However, you can lower overhead costs by making efficient use of your office to reduce waste of space.


This includes combining facilities, downsizing to eliminate unused areas, and enhancing the overall office layout in a way that not only saves space but also makes it easier for staff to move about. Additionally, for smaller businesses that don't need that much office space, consider co-working spaces for rent cost reduction.


Monitor Monthly Expenses


woman using her laptop working from home

Keep a record of your monthly expenses, including variable costs, semi-variable costs, cash expenses, and so on. This way, you can have a clear understanding of where resources go and identify areas in which you can reduce overhead costs.


You can also compute your overhead rate to allocate indirect costs more accurately and determine the total cost of production. This can help you make more informed pricing and budgeting decisions in the long run.


Reduce Energy Consumption

When you conserve energy, you can lower your overhead costs. Encourage employees to turn off devices and equipment when they're not in use and to be mindful of their energy consumption. The money you save on electricity can be used for direct costs and other ventures that can add value to your company.


Consider Hybrid or Remote Work

Another strategy to reduce overhead costs is to shift to hybrid or fully remote work. This is especially beneficial for a small business that doesn't need a physical office space. Additionally, when your full-time employees work remotely, you can save on property-associated costs such as rent and property taxes.


Not only is a hybrid or remote setup cost-effective for your small business, but it can also have a significant impact on your employee morale now that they don't have to worry as much about commute time and gas expenses.


Automate Tasks

When you automate tasks, you reduce or eliminate manual processes which can lead to expensive mistakes. Automating tasks streamlines your business process and minimizes errors, allowing your staff to focus on tasks that need their skills more. This can lead to increased employee productivity, efficiency, and even revenue growth.


Use Inventory Management Systems

You can minimize overhead costs and your overall overhead rate by utilizing an inventory management system. This allows you to efficiently track your inventory and stock levels and prevent over or understocking. You can reduce the overhead cost associated with expired or unusable office supplies and materials. Additionally, an inventory management system allows employees and staff to focus on other more important tasks and activities.


Benefits of Overhead Cost Reduction


employees working in an office

Overhead costs are an unavoidable part of running a business, but that doesn't mean you can't implement cost-saving ideas to improve your business's overall profitability. Here are some of the benefits of executing overhead cost-reduction strategies to help your business grow:


Increased Profit Margins

When you properly manage overhead costs, you can boost the bottom line of your business, which leads to increased profit margins. With more profit, you can explore more opportunities related to business growth and success.


Improved Cash Flow


stack of dollar bills

Similarly, by lowering overhead costs, businesses can enjoy an improved cash flow. The funds that would've been spent on an overhead cost can instead be allocated to primary functions and important projects. With an increased working capital, you have more flexibility and freedom to spend it as needed.


Competitive Pricing

When you free up cash that would otherwise be tied up in an overhead cost, you can offer your products at a more affordable and competitive price. Doing so will help you stand out in the competitive business landscape, allowing you to gain new loyal customers. Additionally, competitive pricing can lead to your business being discovered by a new, wider audience. When consumers find your competitive prices attractive, they'll likely come back for more, and consequently increase your sales volume.


Financial Stability

Benefit from overhead cost reduction by withstanding economic challenges and maintaining the financial stability of your company. Should you face financial troubles, you'll have the resources and funds to weather the storm and get back on your feet.


Financial stability makes it possible for businesses to keep operations running, retain essential talents, and continue allocating money to product development initiatives or market expansion projects. Overall, reducing overhead costs can contribute to keeping your business up and running for a longer time.


Employee Job Security and Morale

Businesses often need to lay off a good chunk of their staff when dealing with a financial crisis. However, practicing overhead cost-reduction strategies improves your financial stability and thus allows you to retain your employees and continue your operations.


Additionally, by responsibly managing profit margins, you can provide incentives and bonuses to your staff and keep their morale high. High morale among employees typically translates to increased productivity. Additionally, happy employees usually produce more quality work and are inspired to work harder. Ultimately, great performance from your employees can only mean good things for your business.


A Note From Redbud Advisors LLC


close-up of a cannabis plant

At Redbud Advisors LLC, we're well-versed in tax considerations and accounting processes in the cannabis industry.


If you have questions about tax compliance in the cannabis business or are in need of professional services such as cannabis bookkeeping and organizational consulting, schedule a call with our qualified advisors today!

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