It’s not uncommon for overhead expenses to increase over time. In fact, it’s part of doing business.
But when overhead begins to mushroom out of control, it’s critical to confront the situation in a timely manner to avoid bigger problems down the road. Here are a few tips to help you manage runaway overhead costs:
Oversight is essential. Always be aware of your overhead expenses. Set time aside regularly to review them. Being conscious of what you are spending alerts you to changes that must be made.
Conduct an overhead review. The goal of your overhead review should not be only to reduce costs, but also to make certain those reductions allow you to deliver anticipated service levels to customers and clients. To that end, you must be aware of what your clientele expects from you. Involve employees in making a list of what your customers most value about your services and what they think might be improved. Awareness of customer satisfaction levels gives you a head start in determining what overhead cuts might be detrimental to your business.
Calculating overhead expenses. Use this simple equation to decide if you need to conduct an overhead review:
(Overhead ÷ monthly sales) x 100 = Overhead percentage
Recommended overhead ratios vary by industry. However, an overhead percentage that is no higher than 35 percent of total sales is considered positive.
Classify overhead activity. Overhead activity can be categorized into three areas: core, support and diversionary. Core activities such as sales add direct value to the company. Support activities such as record keeping do not add direct value, but they support the core activity. Diversionary activity such as time spent on correcting errors adds no value to the business. Since diversionary activities can account for as much as 20-40% of total overhead activity, special attention must be given to this category in determining overhead reductions.
Ideas for reducing overhead. These are some of the key areas you should look at in deciding overhead reductions:
- Renegotiate your lease. The US Chamber of Commerce recommends that you make sure you know how much of a reduction to ask for based on market conditions and your business’s financial projections.
- Evaluate your utility usage. Determine the levels of service your business actually requires. Odds are that you’ll find you’re spending much more than you need to, especially with the advent of competing utility services.
- Rethink Insurance. Keeping certain that you remain adequately covered, review your policies to see what might safely be cut. Failing that, don’t auto-renew when your policy comes due annually. Ask your broker to shop around, as rates can vary widely.
- Rent equipment instead of buying. This eliminates many upfront and maintenance costs. Leasing is not only less expensive, it also helps you keep your technology current.
- Review your contracts. Cancel contracts you may no longer need, and renegotiate the necessary ones.
Benefits of an overhead review
According to the Managers-Net Archive, a properly executed overhead review can result in at least a 20% reduction in overhead costs, usually within a 10- to 14-week period. But it also can benefit your company in other ways. The changes you make can result in improved services critical to your customers. It can make you aware of costly diversionary activity and present the opportunity to minimize it. And it can help provide your management team with a better understanding of the current state of the business, resulting in commitment to your proposals for improvement.
