Posts Tagged ‘operations’

Keep Overhead Expense As A Percent Of Total Sales Low To Save Business Cash Flow

June 21, 2010

by Doug Smith, President, The Woodhaven Group 

Some of the best well run companies in America keep their overhead expense very low.  It becomes a competitive advantage when competing against other businesses.  Your company needs to have the same strategy.

Any available cash from having overhead low can be channelled into marketing and sales to drive marketshare. You never know when the local television or radio station might come to you with a last-minute buy that you do not want to turn down.  If your cash is tied up in fixed overhead costs then that special offer becomes a lost opportunity.  For example, years ago due to a last-minute cancellation our company was offered a Super Bowl Ad by a local network affiliate. Due to having available cash on hand we were able to take advantage of this once in a lifetime opportunity.  Customers talked about seeing that television spot for years afterward. 

Regardless of your industry, one way to monitor growth of overhead is to watch the trend of your actual overhead dollars being spent over time.  You would like overhead dollars to stay the same or decline as sales go up.  Another way to measure the change in overhead is to look at the combined overhead expense as a percent of sales.  As sales increase the percent will decline.  That will  be a good thing. 

What is the takeaway here?  

As owner, when you are managing areas like operations, inventory, and customer service, do not let an increase in overhead prevent you from taking advantage of marketing opportunities that may come up.  In addition, if sales shows an unexpected decline you will already have the overhead expense under control.

Look closely each month at every line item of overhead and constantly challenge the amounts. Overhead expenses can be reduced.

Always have overhead dollars and percent to sales low and trending downward and you will like the strategic flexibility it will give you.