Posts Tagged ‘overhead’

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.

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Pay For Performance Can Increase Productivity And Business Cash Flow

April 27, 2010

by Doug Smith, President, The Woodhaven Group

When a company improves productivity a positive result should be an increase in business cash flow to invest to grow the business.  Pay for performance compensation structured properly can be a driver of productivity.

There has been a trend for some time to reward those individuals who deliver the best results by shifting from straight salary to a lower base pay with some kind of incentive attached.

The intent is to not over pay nonperformers and give the top performers an opportunity to earn more than they were making before.

Many sales forces are used to being paid 100% commission.  That means no sales, no pay.  That also means reduced overhead for the company when sales are slow.  But what about other areas of the company that traditionally are not on pay for performance?  My experience has shown that you can often direct the outcome you desire by compensating an employee on results they can impact.

While 100% pay for performance will not work with all positions, a portion of some of the compensation for certain key people can be based on incentives.  

A few examples:

  • Make 10% of a retail store managers pay tied to reducing shrinkage.  They cannot stop all theft but they can reduce paperwork errors, a contributor to shrinkage.
  • Tie 20% of an accounts receivable manager’s pay to a positive change in days outstanding of accounts receivable.
  • Make a portion of a marketing manager’s pay tied to a reduction in marketing  % against net sales.
  • If customer service has been a problem tie 15% of a fulfillment manager’s pay to a reduction in customer complaints or an increase in repeat purchases.       

You get the idea.  Once you start doing this a next step can be compensating a team of individuals sharing a common goal.

Certain key points need to be kept in mind:

  1. Clearly define measurable goals when using any pay for performance.  Do not make it subjective.  Make sure the employee agrees the goal is attainable.  If the goal is too far out of reach the employee will give up and morale will go down.
  2. Make it clear you are rewarding measurable results and not effort only.  While everyone’s extra effort is expected and appreciated,  it’s the cash flow from increased results that pays the bills.
  3. Show the employee how much he or she can make if the goal is attained.  Then work with them to identify tactics and action steps to be taken to hit the goal and earn the extra income.
  4. Have  meaningful inital and ongoing  coaching sessions  to help the employee hit their goals.  In the beginning some employees may think the company is using this type of compensation to just reduce pay.  Actually, a well put together  incentive compensation program is a win-win.  The company does better and the employee earns more.
  5. Attempt to pay the incentive compensation each pay period.  If that is not practical then pay at least once per month.  The faster you can pay for the results achieved the more motivated your employee will be. 
  6. If the employee challenges the accuracy of the incentive calculation stop everything and verify that it is correct.  If it is not, then cut a new check immediately.

Well structured pay for performance can drive productivity, increase cash flow and retain top performers.

Employees in successful pay for performance programs never want to go back to only a salary or hourly pay.

Give it a try to see if it works for your company.