Overhead Costs - the silent Profit Killer

Now is the time when small business CEOs are pulling together their accounting information in preparation for filing their taxes. I have heard from some in the past couple of weeks and have gotten several questions and concerns.  Some of these raised some serious issues.  Here is one that sums up several of the comments; “I knew from my checking account balance that things were not going so good, but it looks like I am not making a profit (say nothing about paying myself), what can I cut?”

One of the first places to look is your overhead. 

One CEO told me “I increased my markup this last year and I am still not profitable”.

When your overhead is too high, it doesn’t matter how much you mark up your product, your company will still not be profitable.  As a common saying states, the answer is usually in the details.

“Cutting overhead solves a myriad of problems” relates James Beckham a seasoned small business owner from Amarillo, Texas and a content contributor to SCORE’s website resources.   His business interests range from A-V I Corp, a corrections electronics firm, to ranching and real estate.  He suggests looking at the details behind some of your issues.  For example, he illustrates:

  • “Problem – Your customers are complaining that your service department is too slow.

    Solution – Cut your company overhead so you can afford to hire another service person and buy another service truck. Your customers will be happier, and your profits will go up.
  • Problem – Vendors are threatening to cut you off because you are consistently late paying their bills.

    Solution - Slashing overhead will give you the cash to not only pay all your suppliers on time, but allow you to take vendor prompt pay discounts. Prompt pay discounts of 2-5% will help your bottom line.
  • Problem – Your employees are grumbling about wanting raises.

    Solution – Lowering overhead in other areas of the business will give you the flexibility to raise the wages of your most important asset, your employees.”

So, how do you figure out what overhead to cut? 

Beckham suggests:

  1. Ask your CPA (or your in-house bookkeeper) for a detail of what items are in each category of your latest P&L (Profit and Loss) Statement. For example, what expenses are under the “Utilities” category? Electricity, water, gas, sewer, trash removal and internet are typical bills under utilities. Analyze each provider bill looking for ways to lower expenses from that vendor.
  2. At least quarterly, go through the analysis again. Each time you look for places to cut expenses, you will probably find new ways to lower costs.
  3. Look for expenses that you incurred months or years ago that you may not now need. For example, if you took out additional contents insurance for a large customer order last year, are you still paying that increased insurance premium? Do you have enough inventory to justify the premium? Talk to your insurance agent about other ways to lower insurance costs when you cancel that unnecessary contents coverage. 
  4. As you look at each expense item, ask yourself, “Do we need that? Why do we have that expense?” For example, do you know who ordered cable TV for the breakroom?
  5. Sign up for a vehicle fuel service. Fuel cards will save you money and let you track vehicle expenses more accurately. A fuel card will also stop employees from charging snacks to your credit card.
  6. Give employees a per diem instead of paying for out of pocket expenses when they are traveling. When employees receive a per diem, they will stay at more moderately-priced hotels and eat meals that are reasonably-priced (instead of steak dinners twice a day.)

These are just of a few examples of the dozens of places you will find to cut overhead expenses. Look for other places to cut expenses to make your company more profitable. Start that regular process of reviewing all company expenses, and put your firm “in the black” instead of “in the red.”

Beckham says “When your overhead is too high, it doesn’t matter how much you mark up your product, your company will still not be profitable. “

In my next column, I will share some areas that you should probably never cut!

Key Topics

Is Your Overhead Killing Your Profits?