Overhead costs might seem fixed, but it's important to remember that they are always in your control. Find out how to effectively manage your overhead.
By Tara Remiasz
Revenue. Profit. Sales. All those words can entice people into the role of small business owner. But as many seasoned entrepreneurs have learned, revenue is worth nothing if it’s squandered, profit means little if it isn’t captured and sales will get you nowhere if every penny goes to cover costs. Left unchecked, overhead—the costs of running a business, which are not directly associated with the production or sale of goods and services—can be a spoiler to any solid business plan. But how do you know which costs are essential and which can be minimized or even eliminated? The first step is to understand how the money is currently being spent.
Follow the Money
“One of the mistakes that a lot of business owners make is they focus on costs that are insignificant compared to the total,” says Joseph Knight, owner and lead consultant of L.A.-based The Business Literacy Institute; chief financial officer for Setpoint companies, headquartered in Ogden, Utah; and co-author of Financial Intelligence: A Manager’s Guide to Knowing What the Numbers Really Mean.
Often times, small business owners will pour over relatively insignificant costs, such as a utility bill, while neglecting substantially larger expenses, says Knight. The first step toward lowering overhead is to take account of actual costs. Study your profit and loss statement and determine which costs make up the largest portion of your overhead.
Make the Most of Your Workers
Once you have determined the major categories of overhead, Knight says, it is time to assign responsibility for some of those costs to key employees. Ask trusted employees, regardless of what roles they play in your company, to track and give reports on specific costs. “I personally believe wholeheartedly in an open book policy,” he says. “When you involve your whole company in the P&L—and helping them to understand the P&L—you’ll be surprised [at who cares],” he says. Offer incentives for controlling overhead, such as profit sharing based on a pre-established increase in profits.
Although it is important to focus on the largest portions of overhead, don’t make the mistake of cutting something that will hurt your company in the long term. “The very worst thing you could do is just to do the easiest thing and just cut heads,” says Graham Foster, CEO of Pacific Seminars International Inc., which has a North American branch based in Phoenix. Labor is often the most costly of all overhead expenses, but layoffs can seriously damage workers’ confidence and sense of security without providing substantial financial benefits. Instead of cutting your labor force, Foster suggests enriching its value by providing workers with additional training, giving incentives to take on larger roles in the business and teaching them how to limit their use of resources.
Some Interesting Alternatives
For many business owners, the phone bill is a large but necessary component of running their businesses. But thanks to new online technology, many companies can dramatically decrease this cost, says Foster. Voice over Internet Protocol, known as VoIP, is a low-cost online service that acts as a phone line. This type of service reduced one client’s phone bill from $400,000 to $30,000, and another overseas client’s phone bill from $2 million to $1 million, he says. “The telephone industry is terrified about this,” he says. Foster recommends a company called Skype, which provides low-cost and no-cost communication services, he says.
Another tactic to decrease overhead is to fill your company vehicles’ tires with nitrogen, Foster says. At about $5-10 per tire, it will cost you more than regular air, but the payoff is longer-lasting, firmer tires that will increase your car’s fuel efficiency, says Foster. Call local tire companies and ask if they will fill your tires with nitrogen. If they don’t, chances are they will know someone down the block who does, he says.
Everything is Negotiable
“One of the key words in business is negotiate,” says Martin Lehman, marketing director for SCORE New York. Lehman suggests negotiating on everything from rent to your ability to return products that aren’t selling. If you are already renting a space, you can use extension of the lease as your bargaining tool, he says.
Give yourself the upper hand when dealing with banks and insurance agencies by showing that you are open to change if the right offer comes along, says Foster. Don’t stick with one insurance company or bank just because it has served you well in the past. Leverage different bank and insurance companies’ offers against each other. For example, if a new insurance company offers you a better deal than you currently have, take the offer to your current insurance agent and say "I’d like to stay with you. Can you beat this offer?" Show them that they need to work to earn your business—and keep it. Also, because there is strength in numbers, contact local business associations to see if they can provide better rates from banks or insurance offerings or other services.