Excessive Overhead Kills Business
More customers. More customers. Everybody wants more customers. More customers usually means more business. More business leads to more profits.
Isn’t that our goal? Keeping more of the money that flows through the business is what we want.
Almost every monthly column and most of my training seminars, even the individual counseling sessions with business owners, are focused on building the business. We look for ways to acquire and keep more customers. All of this in the name of more profits. And while that focus is impor-tant, there is more to business - and increased profits - than generating revenue.
Maximizing profits requires a look at the cost of acquiring the customers, doing the work for the cus-tomers, and running the back office to keep track of the activities of the business. How the business is run - its management practices - can impact profits as much as the marketing efforts to gener-ate new customers, maybe more.
More Money For YouThere are businesses that have generated an enviable amount of revenue and are still lucky to break even. Some are losing money - no net profits - despite their volume of business.
Others may be spending much more than needed to perform the service work, store the inventory of parts and materials, operate the trucks, and all the other activities it takes to run the business.
So let’s focus on what can be done to keep the overhead expenses low. Naturally, every dollar saved goes directly to bottom-line profits. It’s money in your pocket. I’ll start with five suggestions to reduce that significant threat to your profits - unnecessary money spent for overhead costs.
1. Truck operations. These days, one of the most expensive costs you face is the operation of your trucks. If you control their use, you reduce your overhead for every extra mile they drive.
There are many ways to accomplish this goal, but let me give you some examples of what I mean. First, a truck should not be driven anywhere except on company business. No personal errands or any stops out of the way. It is a business piece of equipment and, though it may seem insignificant, deviations from service calls put extra miles on the trucks and extra costs for your business.
That three-mile stop at the bank or grocery store for the convenience of the driver costs your business several dollars - for each trip, for each truck. Add up the per-mile costs and look at the extra miles. You’ll quickly see the money being thrown away. (Remember, these are bottom-line profits.)
You have probably read my suggestions or heard me speak about the new, efficient global positioning systems that allow you to track all your trucks. When drivers know that the path of the truck is tracked, deviations from direct routes diminish. At the same time, the systems assist technicians looking for an address, so they save many unnecessary miles.
Besides GPS, rules that prohibit personal use of the trucks, and enforcement of those rules, will cut wasted miles. (If the technician is authorized to drive the truck home, it should go from the last job of the day to the technician’s home and then to the first job the next day.)
Guidance for the technician driving the truck helps, too. Efficient dispatching - finding the closest truck and best technician for the job - reduces truck miles. All the miles contribute rapidly to increased vehicle costs, so anything you can do to monitor and reduce truck miles will help. You’ll see the difference on the next financial statement.
2. Equipment purchases. If you look around the office and warehouse, you’ll see some equipment that would be nice to replace. Newer models look cleaner, are probably more efficient, and may have some of the “nice-to-have” features that yours don’t have. It has always been tempting for me to want to acquire the new model, even though the old one is still operating and is in use everyday.
Copiers, tools and equipment, computers - all of these items have a newer model available. They would be nice to have. But can you afford to add these costs to your overhead now, with the current equipment functioning properly? Unless there is a cost savings that can be demonstrated or a realized shortened payback period, such as computer software or GPS, buying the new item only boosts overhead.
With all the competition from vendors available today, you may have more choices of where to make purchases. Searching the Web for suppliers is easy and fast; you might even find what you are looking for on eBay.
Unrestricted parts and equipment purchases, though it sounds convenient and efficient, can cost your business a lot of money. Permitting employees to have “free-flow purchasing,” where they can purchase parts on the company account anytime they want, encourages excessive spending. Restrict who can freely use the company account to buy supplies.
3. Parts management. It may be convenient or tempting to buy more than you need from the local supply house. Don’t give in to temptation for the sake of convenience. Buy what you need and reserve the cash for those additional items until you need them. Plus, all the time the parts sit, your money spent for purchasing them is sitting idle, too.
How well do you keep track of defective parts? Do they sit on a shelf or in a corner, waiting to be returned when you get around to it? That stack of parts waiting your attention is money - your money - sitting in a corner doing nothing. Return those defective parts now. Get your money back in the business or get usable parts. Either way, you come out better than keeping an inventory of defective parts.
4. Examine financial statements. Financial statements are valuable in reporting where your money goes for overhead expenses. Get with your accountant (or look at it yourself) and scrutinize every overhead category to see where money is being spent.
First, look for expenses that are not directly related to accomplishing service work, then examine the costs for performing the work. A good example is overtime pay. Was overtime pay really necessary for the occasions that you paid it? Was it authorized? Is there a standard or policy? Sometimes it’s nice to finish a project, but with a 50 percent increase in labor cost for the overtime expense, does it make sense?
What can be finished the next day or next week doesn’t require a dramatic increase in labor cost. By monitoring overtime, you’ll see savings in overhead.
Spend some time looking closely at all your expenses and you’ll identify a few that can be cut. There is something powerful about looking at the numbers away from the pressure of the daily activities, where it might be expeditious to get something taken care of quickly and easily. Convenience can be expensive. Planning and policies can save valuable funds.
5. Rely on experts. Certainly you have heard the cliché about saving money by doing your own surgery. Experts, whether medical or financial or managerial, can do the job better and are a more efficient use of your resources. Hire an expert to review your business practices and your overhead costs.
A person outside the business, one who knows the industry, can spot glaring oversights when the owner may take some expenses for granted. “We have always done it that way” is not the best analysis. By having an expert look at your financial records, and your business as a whole, you will get a fresh analysis of modern ways to save money in your business.
Keep The CustomersIt probably goes without saying, but I will address it anyway: Don’t go overboard and cut customer service or quality. Those are key value items in your business. They distinguish you from the competition. Using second-rate practices or untrained technicians to save money will backfire.
You have built a reputation in your community; keep it. Hasty jobs or putting technicians under pressure to quickly do a job and depart the customer’s premises will hurt your reputation. Train your people so they always do the job right the first time, and you’ll save money.
Your flat rate charges are justified by a high level of service and quality workmanship. Skimping there is shortsighted. You can still deliver quality service and reduce costs at the same time.
My suggestions for reducing overhead are not an exclusive list. Pick up a copy of your financials and you’ll see what I mean.