You might think your overheads are lean, but are they?

Do you want your business to be more profitable?  Silly question really; you may not wish to be any bigger as a business but it would be nice if you had a better bottom line from your efforts.  And as a small business owner or manager there can be no doubt that you are putting in a big effort.  That's the inevitable fact of life for someone in small business.

Another inevitable fact is that you only have a few options when it comes to increasing the bottom line.  Everybody immediately thinks of selling more and that is never to be ignored.  But can you really handle more work than you are at the moment.  Sometimes your resources may be stretched with just doing what you're doing.  So selling more can be an answer but is not necessarily the answer.

The answer may lie in improving your margin, your gross profit, either by increasing your prices or reducing your cost of sales, or indeed a little of both.  Increasing the volume of gross profits you make can make a significant difference to your net profit.  But again it can be an answer but not necessarily the only answer.

The answer may lie in your overheads.  Now most small businesses are pretty lean machines.  There is not much fat hidden in the overheads that can be easily identified and squeezed out.  But that doesn't mean there aren't a few little pockets of flab to be found.  And eliminating any such pockets will add weight to the bottom line.

There are long term benefits in identifying any such flab. 

Once reduced they are likely to stay reduced, so the benefit provided will continue to be provided for quite some time.

In a competitive market a low-cost structure will make a significant difference.  The saying "business compete on costs, not prices" has some relevance.  Overhead costs don't directly make your product or deliver your service.  But you have to be careful.  Overheads don't directly benefit your customer, but they do provide the support processes which enables your customer processes to do so.

The more you reduce your overhead while supporting the customer related activities as efficiently as possible the greater your profit will be!

 

So how do you minimise your overheads without unnecessarily hindering your business? 

It is easy to stop spending money, but there can be long term adverse effects from a poor decision.  For example you could decide to cut that Yellow Pages advertisement, after all they can be expensive, but if the Yellow Pages are an important source of leads then cutting the advertisement would be a silly decision.

There are some better, more methodical steps that you can take.  They are:

  • Looking at each cost element and asking how long has it been since competitive quotes were sought on that item;
  • Subjecting each purchase over a certain value (what ever is appropriate to your business) to a proper procurement process; and
  • Benchmarking your costs against industry averages.

We've always used that supplier! - The modern trend for business is to minimise the number of suppliers it has.  And that makes sense.  Fewer suppliers means fewer accounts to maintain, fewer suppliers who might take rogue action against you for slow payment, the opportunity to build better, long term relationships with suppliers who will have a better understanding of your business.

But the relationship can allow flab to develop.  It is good practise to test the market if you haven't done so for awhile.  There can be savings.  Take insurance for example.  Depending upon where you are and the nature of your business you may have insurance for building and contents, vehicles, public liability, employees, management health, and/or professional indemnity.  Insurance can be used to mitigate all manner of risks to the business.  You may arrange it directly with an insurance company, or an insurance broker.  Now a broker it is the role of competitive quotes from alternative insurance companies.  But you need to test even these.  You may be surprised at the result.

So take a run through your overhead costs and ask yourself how long has it been since you tested the market for that item.

Testing the market may mean arranging supply in a different way than you do currently.  For example your IT support may come when there is a problem, and charge accordingly.  A monthly retainer which gives you the freedom to call up support, plus a regular check up on your systems may result in lower overall costs, more certain costs, and a more reliable system. 

Do you use a proper procurement process?  Let's face it, you don't want go a get three quotes every time you purchase something.  But for more significant buys, whether they are for equipment or on-going services such as accounting or insurance it is worthwhile getting a number of quotes.

If you are getting quotes, it is worth doing it properly.  And doing it properly means drawing up a specification of what you want and when.  There are many advantages in doing so.  It makes it easier for your supplier to respond, and easier for you to compare offers.  It saves a lot of argument later on if there are any problems.  You are not arguing on memories but fact.  If you have missed something it is quite likely that a potential supplier will suggest that you also include ‘xyz'.  And you are also likely to end up with better value, as any good supplier will not only compete on price but also benefits either in performance, features, or more flexible arrangements.

In going through this process a useful step is to get other users opinions on the supplier's performance, either before you select a list of potential suppliers, or before you make a final decision.  A good supplier will provide testimonials, so test the testimonials!

For whatever reason most businesses, and not just small businesses, pay even less attention to proper procurement than they do to marketing.  Yet procurement well practised can make a significant difference to the bottom line.

One last thing.  When you have made your choice, go back to the unsuccessful suppliers and let them know the outcome.  It is common courtesy that really isn't that common.  They will appreciate it, and you never know when you might have to go back to them again.

There's one final check you can do - and that is benchmark your costs against industry averages.  Benchmarking financial information can provide useful comparisons.  For example, the following summaries are provided from one supplier of this information for "Building Contractors".  These classifications may vary from industry to industry.  The information is usually supplied in both dollar and percentage terms.

  • Productivity per $ of Wages & Contractor Payments

o        Income

o        Gross Profit

o        Non Personnel Overheads

  • Margins & Major Overheads

o        Materials

o        Wages, Salaries & Sub-Contractors

o        Vehicle Operating

  • Minor Overheads

o        Insurance

o        Telephone & Fax

o        Repairs & Maintenance

o        Other Depreciation etc

o        Interest/Bank Charges

  • Profit & Profitability

o        Net profit per Working Owner

    • Gross profit per person

Where do you get this information?  There are a number of specialist providers, and some banks will also provide information.  Here are a number of sources in Australia and New Zealand.  A rigorous on-line search will no doubt produce sources elsewhere.

  • MYOB Business Benchmarking uses the most comprehensive financial database in New Zealand, managed and maintained by the University of Waikato for over 20 years. This tool provides an easy way for you to submit benchmarking data.
  • The University of Waikato (MRC) have a long and proud history of storing, analysing, and providing benchmarking data. You can now join this benchmarking service and submit financial data online, using a simple step-by-step wizard.

One thing is for sure.  If you don't keep your financial records meticulously and with the proper detail than you will not be able to take any of these steps.  The more you know about your company's financial situation, the greater chance you will have at success.

Each small business will have differing overheads, but if the business is efficient opportunities will arise where cost savings can be made.  Finding and eliminating the flab in your overheads without hindering your ability to properly service your customers will turn your business into a lean, profitable machine.

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© Adam Gordon, Profits Leak Detective

 

 

 

 

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