Ask Andi: How do we reduce overhead costs? They’re dragging the business down. Revenue is growing but so are costs. Profits are the same as when revenue was lower. Why try to grow at all?”
Thoughts of the Day: Reduce overhead costs that last. Separate costs that fluctuate from expenses that are more constant. Consider the impact of less obvious cost drivers such as complicated customer requirements. Verify that pricing margins match goals. Have everyone contribute to a dialog: “Do we really need to be doing this? How could we do this more simply? How could we do this better at a lower cost?”
Reduce overhead costs that last
Many business owners find that growing sales don’t result in a significant increase in overall profit. Their level of frustration makes them question the value of growing the business. They lose sight of the fact that if sales aren’t growing by at least 8% – 10% per year; the business is at risk of long-term decline.
Separate out “cost of goods sold” from “overhead” expenses. Cost of goods sold should follow the same up and down the track as revenue. Overhead should be constant month after month.
Separate marketing and sales within the overhead. They are fuel to drive up revenue. They increase ahead of revenue growth, then drop as less effort is needed to maintain the new level of income.
Look at the role customers play in driving costs up or down. Not all customers or products are equal. Some products may have more complex requirements. Some customers may be better negotiators. Graph revenue and cost of goods by customer and by-product to find trends.
Reduce unproductive expenses
Focus on customers and products with the greatest cost of goods sold as a percent of revenue. Look at what influences that percentage. Ask:
- Is this customer or product worth the extra effort and lower profit margin?
- How much more profit would result by shifting resources away from a less profitable product or customer, to doing something with a higher margin?
- What kind of advance spending in marketing and sales would be needed to make the switch? Would that switch pay off over time?
Question all overhead costs. Are they necessary? Is there a more efficient way of doing things? Could adding a computer program, with a one-time installation cost, produce long-term savings? What about the potential for efficiency that comes with shifting employees from generalists to specialists?
Does the company have an overall goal for the margin it wants to make? Is everyone in the company aware of that goal? Do all employees understand their role in and responsibility for keeping costs down? Do they have a way to measure and manage how well they are doing at reducing costs?
Don’t look for a magic bullet
Many business owners make the mistake of not sharing enough information on product and customer profitability. Some owners fear letting employees know how much they’re making. Keeping employees in the dark about the numbers of the business and hiding the results of efforts to improve profit margins is crazy behavior.
Employees can have a major influence on costs. They need to see the results of changes in order to understand what’s working and what isn’t. Graphs of cost of goods sold percentages, overall, by product, by the customer, will help everyone better understand and analyze what’s going on.
Engage employees at every level. Teach them to constantly question whether the way things are handled is the most efficient and effective. Encourage disrupting the status quo in favor of testing out possible improvements. Establish workgroups to tackle questions about costs in specific areas. Make sure employees have time to meet to discuss what they’re working on, to report results to others in the company, to brainstorm new initiatives.
Looking for a good book? The Lean Six Sigma Guide to Doing More With Less: Cut Costs, Reduce Waste, and Lower Your Overhead, by Mark O. George.
Want to print this article? Overhead is over my head
