In general, small businesses spend between 10-30% of their budget on overhead expenses.
Did your stomach turn reading that? If you’re spending over 30% on expenses that don’t contribute to your bottom line, keep reading. These silent budget-eaters can slowly drain your resources and keep you from investing in core business activities.
But before we dive into cost-cutting strategies, it's crucial to understand where your money is going. In this blog post, we'll explore four hidden sinkholes in your overhead and then examine three real-world examples of how businesses like yours have successfully reduced their costs using Professional Employer Organization (PEO) services.
4 hidden overhead cost sinkholes
1. Recruitment and hiring
The recruitment and hiring process can be a significant (time and money) source of waste for businesses. High advertising costs associated with job postings and recruitment marketing can quickly add up, especially for positions that are difficult to fill.
Prolonged vacancies lead to productivity losses as teams struggle to cover the workload of missing members. The most costly of all is high turnover rates, which result in repeated recruitment and training costs, creating a cycle of expense that can be challenging to break.
2. Benefits administration
Many businesses, especially smaller ones, face challenges in benefits administration. Without the negotiating power of larger organizations, small and mid-sized business often end up paying more for less comprehensive benefit plans. This not only impacts the bottom line but can also affect employee satisfaction and retention.
Additionally, compliance issues, particularly with complex regulations like the Affordable Care Act (ACA), can result in hefty penalties and fines if not managed correctly.
3. Payroll processing
Errors in payroll can result in costly consequences, including fines and overpayments. The sheer time consumption of payroll processing and handling related queries can be substantial, taking valuable hours away from core business activities.
4. Employee relations
Employee issues/disputes can be a hidden source of waste for many organizations. Legal costs related to handling employee disputes and ensuring compliance with labor laws can quickly escalate. Not to mention the time spent managing these issues represents a significant opportunity cost, diverting attention from strategic initiatives.
3 case studies and the cost savings of a PEO
To find your way out of a cost sinkhole, take a look at these real-world examples. Each case study is a client of PRO Resources, a PEO that provides HR services to small and midsize businesses. PEOs help solve problems related to high overhead by simplifying admin, benefits, payroll, and more.
Case study: small business savings
A small business with 50 employees was spending approximately $100,000 annually on an HR team, benefits administration, and compliance management. After switching to a PEO, these costs were reduced to $60,000 annually due to streamlined processes and better-negotiated benefits. The result: an annual savings of $40,000, which could be reinvested into core business goals.
Key takeaways: By providing access to a team of HR professionals and legal experts, PEOs reduce the
need for businesses to maintain expensive in-house specialists. This is particularly beneficial for small
and mid-sized enterprises that may not have the resources for a full HR department.
When it comes to benefits, PEOs pool employees from multiple clients, giving them significant leverage to negotiate better rates for benefits and insurance. This allows even small businesses to offer competitive benefits packages at lower costs.
Case study: mid-sized company tackles turnover
A mid-sized company with 200 employees was struggling with high turnover, costing around $500,000 annually in recruitment and training. By partnering with a PEO, they were able to improve their benefits package and employee engagement strategies. This led to a 30% reduction in turnover costs, saving the company $150,000 annually.
Key takeaways: With better benefits packages and more efficient HR processes, businesses can improve employee satisfaction and productivity. This indirect cost saving can have a substantial impact on a company's bottom line over time.
Case study: eliminating compliance costs
One company faced $50,000 in fines due to non-compliance with labor laws and tax regulations. After engaging PRO Resources, they were able to leverage our compliance expertise to eliminate these fines entirely, resulting in an immediate annual savings of $50,000.
Key takeaways: PEOs stay up-to-date with the latest regulations and ensure compliance with federal and state laws. This proactive approach significantly reduces the risk of costly fines and legal issues that can arise from non-compliance.
In a cost sinkhole? Here’s a ladder 🪜
Reducing business overhead is a critical step towards achieving profitability. As you saw through some real-world examples, partnering with a PEO like PRO Resources can help you get there.
By addressing recruitment, benefits, payroll, and employee relations, PEOs offer a comprehensive solution to many of the overhead challenges faced by small and medium-sized businesses. If you’re stuck in a cost sinkhole, reach out for a free consultation. Our HR experts can help identify waste and ways to get your business back on track.