HOW TO CALCULATE AND RECOVER OPERATIONAL COSTS

Running a business is like balancing on a tightrope. Every decision you make impacts your bottom line, and operational costs can often feel like a constant weight pulling you off balance. Rising wages, unexpected supplier price hikes, and those “hidden” costs that quietly creep in, it’s overwhelming.

Yet, ignoring these costs isn’t an option. The more you allow them to grow unchecked, the more they eat into your profits, stifling growth and threatening your long-term sustainability. But there’s a way forward. By gaining clarity on your operational costs and implementing strategies to recover them, you can regain control and future-proof your business.

Let’s break it down step by step.

Step 1: Pinpoint every cost; The visible and the hidden

Operational costs aren’t just the obvious ones like rent, wages, or utilities. There are often hidden costs that sneak up on your balance sheet and gradually erode profitability.

Here’s a closer look:

Employee Costs Beyond Salaries:

• Employer National Insurance contributions (13.8% in the UK)
• Pension contributions (typically 3-5%)
• Paid leave, sick days, and benefits like healthcare and training

Utilities and Overheads:

• Broadband, electricity, and water bills
• Office supplies and maintenance costs
• Depreciation of equipment

Business-Specific Costs:

• ?Industry subscriptions and memberships
• Compliance costs related to health and safety
• Unexpected fees, such as late payments or penalty charges

By systematically listing every expense, you create a clear, comprehensive picture of your operational costs—eliminating any guesswork.

Step 2: understand the true cost of wages

When budgeting for staff, many leaders focus solely on gross salaries. However, the total cost of an employee extends far beyond their pay packet. Consider the following example:

For an employee with a ￡40,000 gross salary:

• Employer National Insurance: ￡5,520
• Pension contributions (3%): ￡1,200
• Benefits like annual leave, sick pay, and training: ￡2,500

Total cost to the business: ￡49,220

By calculating these “hidden” employee costs upfront, you avoid under-budgeting and can make better hiring decisions that align with your financial capacity.

Step 3: Evaluate and allocate overhead costs

Overhead costs represent the backbone of your business operations, yet they often go unexamined. Breaking them down allows you to understand how they impact different areas of your business.

Consider this allocation approach:

• Direct Allocation: For costs directly tied to projects, like materials or specific tools.
• Proportional Allocation: For shared resources like office rent or utilities, allocated by department or team size.

This helps identify areas of inefficiency, enabling you to streamline processes or negotiate better terms with suppliers.

Step 4: Strategies to recover operational costs

Knowing your costs is one thing recovering them is another. Here’s how you can reclaim control:

1. Review pricing models: Regularly evaluate your pricing to ensure it covers all operational costs while maintaining competitiveness. Adjust prices where necessary to reflect rising costs without alienating customers.
2. Negotiate supplier contracts: Don’t accept rising supplier costs at face value. Regularly review and renegotiate contracts to secure the best terms or consider alternative suppliers if necessary.
3. Automate and outsource: Automation tools can save both time and money. Consider outsourcing functions like IT support, payroll, or debt collection to reduce internal overheads.
4. Monitor cash flow proactively: Use cloud-based accounting tools to gain real-time visibility into your finances. Regular monitoring of cash flow ensures you can react quickly to any financial discrepancies.

Step 5: Invest in financial clarity with technology

Cloud-based accounting platforms offer a seamless way to manage operational costs by providing real-time insights. These tools allow for:

• Automated cost tracking
• Detailed cash flow projections
• Customised financial reporting

By leveraging technology, you can avoid financial blind spots and make data-driven decisions that enhance profitability.

Understanding and recovering your operational costs isn’t just about cutting back, it’s about working smarter. With a clear strategy in place, you’ll be equipped to protect your margins, streamline operations, and ensure sustainable growth.

At Williamsons Consultants, we help business leaders identify hidden costs, optimise their financial strategies, and unlock new growth opportunities.

Ready to transform your operational efficiency? Let’s discuss how we can support your business in reducing costs and driving long-term success.

?? Contact us today: 07768 390330

?? Email: [email protected]