Dear Ken Keller,
How do I keep my overhead down? It seems to be growing despite my best attempts to keep it under control. – David C.
Your issue is a common one among anyone in charge of a profit and loss statement. Let’s be clear about what overhead is. Through the years I have defined it with my clients as “something you pay for on a regular basis whether it is used or not.”
Examples include rent, utilities, payroll, insurance, leases and contracts, and service agreements.
Set a goal to keep your company’s overhead at a set percentage of revenue.
Keeping overhead down, or at a minimum, under control, requires ongoing vigilance by someone who “owns” the profit and loss statement. Cost creep is a common business ailment.
Often, owners fail to get into the weeds of looking at payables. The money, or your increasing overhead, is in the details and each line item on invoices needs to be reviewed regularly. Yes, this is a pain, but those line items are where the gold will be found.
Chances are you are paying for things you don’t use or need. An example would be excess space you’re writing a check for that you could sublet. Another might be phone lines that should have been disconnected but no one took the initiative to do so. Service fees and other charges might have been added to invoices without knowledge or approval.
My opinion is that most companies can reduce overhead by 10 percent if they simply pay attention to what they are spending each month. I also recommend getting your employees involved in the cost-cutting process and consider sharing some of the savings with them as the overhead goes down.
Finally, you may need to restrain your own tendency to spend or approve spending. When addressing overhead, make a decision to spend or not spend based on the simple concept of “must have” versus “nice to have.” Everyone in your company should be able to get on board with that concept.
Dear Ken Keller,
At some time in the future I am going to want to sell my business and have some money in the bank as a result. What do I need to do to start building some depth and leadership skills in my management team? I think I want a potential owner to come into the business knowing that the people here can take care of business. – Miguel L.
What you need to do is follow a five step process. Keep in mind that this will not be easy; it will take time and you may find yourself making challenging decisions.
First, lay out the company’s organizational chart by function as of the day the new owner takes over. Second, assess your current managers; who will make the cut? You want the new owner to not have any doubt about the competency of any manager.
Third, identify the gap of skills, capabilities and talents of those members of your management team and create personal improvement plans for those you intend to retain. Fourth, identify what any new function will look like and define what background, education and work experience will be needed to fill those new management jobs. Those jobs may have to be filled from the outside.
Finally, lay out the timetable and budget for making the transitions from your current organizational chart to the new one and determine what you need to actually begin making the changes.
Ken Keller is a syndicated business columnist focused on the leadership needs of small and midsize closely held companies. Contact him at mailto: [email protected]. Keller’s column reflects his own views and not necessarily those of this media outlet.