SCORE

Call or email me and say, “I’m not making a profit.” I don’t have to hear your tale of woe to know the reason the bottom line of your profit & loss statement is printed in red – your overhead is too high.

“But,” you say, “I increased my markup, and I’m still not profitable.” I could have guessed that.

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

Cutting overhead solves a myriad of problems:  

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.

Here are some specific places to reduce overhead:

  1. Instruct your warehouse employees to turn off the lights every time they leave the warehouse. When they exit for the night, they must also lower the thermostat on the heater. As you are leaving each night, check the warehouse - I’ll bet the lights are still on and the heater is set at 78 degrees. The back door is probably unlocked, too. . .
     
  2. Teach your employees to turn off their computer monitors and local printers before they leave each day. Any electronics that are on standby are still drawing power and raising your electricity bills.
     
  3. Every office has at least one Brenda. Brenda is always hot, so she demands that the office temperature be kept at or below 40 degrees year round. If the temperature gets above 40, she complains loudly and heads for the thermostat. The rest of your staff has gotten tired of arguing with Brenda, so they are now wearing parkas and gloves to work. Brenda also has cold feet, so she runs an electric heater under her desk regardless of the season. Bet you didn’t know that Brenda never turns off that heater when she goes to lunch nor when she leaves at night. Brenda’s heater is costing you at least $50 a month in electricity. Brenda’s internal thermostat is also costing you another $60 a month in air conditioning bills and upsetting the rest of your staff.
     
  4. Do you really need the local newspaper delivered to the office daily? My guess is that your receptionist takes the paper home each evening because no one else is reading it.
     
  5. The single-serving coffee maker your employees pressured you into buying is the most expensive way to brew coffee. Tell your employees you will pay for coffee for a conventional coffee pot, but not their single-serving coffee pods. If Bob thinks he can’t live without his decaf caramel mocha frappachino twice a day, he can bring his own single-serve pods.
     
  6. You used to ship a lot of boxes from your store to customers. Now, you have most products drop-shipped directly to clients from your suppliers. You are probably still paying UPS and FedEx a weekly pickup fee even though you are not using the service. Eliminate freight pickup at your office, and take your occasional shipments to the UPS store in the next block.

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

  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. Now, go 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.”

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