4 Reasons Why Your Overhead Is Too High

Gene Marks

Your overhead is too high. It always is. It may not seem so now. But it will someday. That will be the day when the economy turns south, or a big customer leaves, or orders unexpectedly slow. And then you’ll be cutting and slashing.

That’s not management.
That’s panic.

The smartest business owners I know keep overhead low and conserve cash even when things are good. Because things are never always good. But are you doing all you can to prepare for that day?

Are you paying enough attention to the financial details?

Do you get timely financial reports? Do you look at this month’s expenses compared to last month’s expenses? Do you read your general ledger? Do you have a budget? Is your bookkeeper afraid to bring any significant overages to your attention? Are you not paying attention to the details as often as you should, and are some expenses slipping through? Don’t worry – lots of us do this. Don’t worry – lots of us do this. But the successful business owners I know don’t micro-manage. They just make sure they’re closely looking at their numbers, or at the very least employing someone who is doing that for them.

Are you too extravagant?

Are you paying rent for an office in a downtown space when you know that a similar space in the suburbs would do just as fine? Is your office bigger than it should be? I get it – you want to impress your clients and your friends and project a certain image. But is it worth it? Maybe you’re making lease payments on an expensive car. You may enjoy flying first class and staying at four star hotels. Do you take your customers to the best restaurants? It’s all good. But again: is it worth it? Are you spending money now when you may really need it later? No one is telling you not to enjoy yourself or not to try to make a good impression. But sometimes less can be more.

Do you question the things you should?

You assume that your utility bill is what it is because that’s what it is. You think that the monthly support charge you’re paying to your IT firm is the norm. You believe that you’ve got the best mobile plan available. You think you’re doing everything you can with technology. Are you sure you’re right? Don’t believe me? Ask for an energy audit (many utility companies provide these). Bring in a couple of IT firms to assess your network and bid for your business. Call up your mobile provider and ask them if there’s a better plan. Haul in your software vendor, ask him to review your systems and make recommendations. What will you learn? You’ll learn that you could be saving money in more ways than you previously thought. Or at the very least making better use of your outside experts than you were before.

Do you choose not to?

You should re-negotiate that equipment loan but you don’t have the time. You know you could be getting better pricing on a certain raw material contract but you don’t have the desire to push the envelope. You’re sure that those freight bills could be lowered with a little negotiation but you’re busy doing other things. These are choices you’re making. Every day you are trying to be as productive and profitable as possible. Sure, you may be able to save a few hundred bucks by considering another waste removal service. But maybe your time is better spent selling that customer with the multi-six-figure contract that will go much farther towards the bottom line. And maybe you just don’t feel like it because you’re tired. It’s OK. This is your choice.

So how about a little spring cleaning of your overhead?

Things change. Your business grows, it shrinks, you bring on different people, different products, have different needs. What your company looked like five years ago bears no comparison to what it is today. Your overhead has changed too. It creeps up before you know it. Don’t let it creep up. Because if it gets too high for too long you’ll find yourself being forced to make changes that you weren’t expecting. Your overhead will always be higher than it should be. The trick is making sure it doesn’t get too high.

15 Responses to "4 Reasons Why Your Overhead Is Too High"

    • James Manley | August 7, 2018 at 4:16 pm

      <<>>

      Do you question the things you should?
      You assume that your utility bill is what it is because that’s what it is. You think that the monthly support charge you’re paying to your IT firm is the norm. You believe that you’ve got the best mobile plan available. You think you’re doing everything you can with technology. Are you sure you’re right? Don’t believe me? Ask for an energy audit (many utility companies provide these). Bring in a couple of IT firms to assess your network and bid for your business. Call up your mobile provider and ask them if there’s a better plan. Haul in your software vendor, ask him to review your systems and make recommendations. What will you learn? You’ll learn that you could be saving money in more ways than you previously thought. Or at the very least making better use of your outside experts than you were before.

      “Haul in your software vendor” – as a software vendor, this seems very offensive. We encourage dialog with our clients and don’t need to be hauled in to a meeting.

    • dennis p dominic | August 7, 2018 at 5:39 pm

      I started my business about 16 years ago after about 27 years on the corporate side of things. The functional foundation of business is based upon sound “policies” and “procedures” regardless of the size or scale of the enterprise.

      Without these re: finance, accounting,marketing, sales, CS, logistics, HR, you foster unbridled, inconsistent chaos everyday. The policies and procedures may rankle the independent zeitgeist of the entrepreneur. Assembling a list re these areas provides a foundation for sound operational execution and consistency.

      It might sound boring or constricting, but it provides for smooth efficient operation.

      DPD

    • Art Buckman | August 8, 2018 at 10:19 am

      Nice article. As an Expense Management Consultant, the above activities can make a big difference to your bottom line. If you don’t have the time or expertise to do the work internally, there are firms that can do it for you at a reasonable rate.

    • Martha McLean | March 20, 2019 at 8:41 am

      As a Bookkeeper I will say that the first part is excellent – watch your expenditures and make it easy for the Bookkeeper to come to you when something looks too high. And NEVER give the Bookkeeper signing authority for money – not all are that honest, and sometimes they just borrow a little and pay it back…and that grows.

      However, as the Payroll Manager you neglected to mention the ONE major expense for every company with employees – payroll. Look at your employees – all of them, not just the low-paid. Bring in an efficiency expert – or just someone not afraid to rock your boat. You may find that you have too many employees, and with a paycheck, taxes, benefits….it adds up. That being said, if you cut a position and then overwork other employees without compensation, you will end up with less output. Remember that all positions have equal importance – but all employees – as individuals – do not.

    • Sam jackson | March 20, 2019 at 10:50 am

      Be your own bookkeeper. In today’s day and age it takes so little time and you see every expense. Once you turn over your books you have lost control of your expenses.

    • James | March 20, 2019 at 12:07 pm

      These are all good categories to look at. I think what needs to be pointed out in each category is that you should know what your norms are in your industry. When you look at your payroll, what are normal % of net revenue to spend on each position? If you are wondering if your “office is too big”, what is a normal % of net revenue for rent/ lease? If you are over that, what are you getting for it in ROI? If you assume your power bill is too high, what is the normal % of net revenue to spend on utilities?
      A huge help is knowing the normal metrics in these categories.
      My % of net revenue for labor in my industry should be 66-68%. If it is 71%, I’m not going to fire anyone. I live in an area that is difficult to mind the professionals I hire. I’m willing to pay a little more in that category. In my industry, fixed expense should be 14% of net revenue. However, because I live in the remote area that is hard to get professionals, my rent is dirt cheap. So, my fixed expense is only 11% of net revenue, and it balances out with my labor being high.
      If you don’t know what normal is, you won’t know if you’re paying too much or getting a good deal

    • Susan Knight | March 20, 2019 at 12:44 pm

      Ms. Martha McLean’s comment is very valuable. I have been self-employed for 44 years……and you get “lazy” in business. We were in a very big crunch with several big clients simultaneously and neglected the new bookkeeper. Within 6 months she had embezzled $140,000. It doesn’t make sense to worry about the electric bill, and then ignore the person who can do the most damage to your company! With computers, the damage can be quite large and quite invisible. Ms. McLean is right….pay attention to the bookkeeping and the bookkeeper (PS……this bookkeeper managed to steal $1.4M from 4companies over the course of 3 years. She was given 5 years in jail for her bad deeds…..but she left a lot of damaged small businesses in tears!.

    • Clarise Lyon | March 20, 2019 at 10:27 pm

      Thank you. This is helpful. I’m finding that as my business grows, the growing pains of finding the right people becomes harder.

      What we offer is unique and we need that unique person who can not only be able to implement program; but have the necessary executive function skills to differentiate when needed, adjust, and maintain the social emotional skills required to work with people.

      Some employees require more energy and you have to decide if the individual is worth it I am also finding myself thinking outside the box–how can I make what we do better for everyone!

    • Christine Cunha | March 23, 2019 at 11:09 pm

      Yes, a good bookkeeper can be hard to find BUT they can be indispensable. Full disclosure: I am a professional bookkeeper. I’m sorry to hear tales of woe about people in my profession who take advantage of what can be an intimate and powerful position.

      Precautionary steps to reduce the possibility of embezzlement include:
      (1) never have your bookkeeper sign checks,
      (2) Maintain a “view only” bank access so that s/he cannot transfer money.
      (3) Receive & review bills prior to payment (sign off on them). Do not let the bookkeeper pay bills that have not been approved.
      (4) Review your bank account for unusual activity (online & the monthly bank statement. Request a mailed copy from the bank with check images for easy review.

      Some overhead is worthwhile. The right bookkeeper can save you money by increased efficiency, more timely billing and attentive review of your accounts.

      We are not all bad apples.

      • Hannah Sullivan | March 25, 2019 at 8:41 am

        Great advice, Christine. Thank you for providing this information.

    • Alison Van Doren | March 27, 2019 at 7:18 am

      What about the elephant in the room? The price of insurance. The price of health insurance has gone through the roof and small businesses don’t have many options, but it doesn’t hurt to review other insurance coverage periodically too to see if policies still meet requirements.

    • Susan Knight | March 27, 2019 at 12:48 pm

      I would add to Ms. Christine Cunha’s comments: you should keep control of your physical checks. As whacky as that sounds, if you are a small business, the way someone can steal from you is by writing checks to vendors, voiding the checks, then re-writing new checks to herself.

      So, while the bookkeeper presented the check to me for payment, along with the invoice from the vendor, she then tore it up and re-wrote the check to herself. My error was in not following up, like Ms. Cunha says, with my bank statements to see what was happening after that. If you control the check numbers, then you will at least be controlling that end of the check writing.
      The way this bookkeeper stole from another small business (architect) was to steal money from the company IRA funds for the employees. I have no idea how this bookkeeper did that hat trick!

      I will say that Hartford really stepped up for me and helped me through this nightmare. They were “johnny on the spot” with the insurance coverage payment (small amount, but helped my crushed ego a little bit). I will tell you small business owners….you can get some coverage for internal damage like this.

      • Hannah Sullivan | March 28, 2019 at 8:34 am

        Thank you for being a loyal customer, Susan, and sharing your experience.

    • Susan Knight | March 28, 2019 at 8:50 am

      Thanks to The Hartford for standing by us as small business owners. It’s always hard to know who to trust. The Hartford was very supportive during my time of need. I called you and you would call me right back with good information. You stuck by me and I’m sticking by you! Thanks.

      • Hannah Sullivan | March 29, 2019 at 7:48 am

        Thank you for being a loyal customer, Susan!

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