Overhead Costs Management
ABOUT
Management of overhead costs is critical to ensuring that a business is profitable. Overheads, sometimes called indirect costs are incurred by the business but do not directly contribute to the cost of the product or service. These are usually “Fixed” and do not increase significantly with volumes.
As overheads are largely not related to volumes, these are reviewed against past trends and strict budgets. Also awareness of technology changes may bring the opportunity of introducing new systems which can improve the effectiveness of sales and administration activities and reduce costs.
Cost cutting measures along with stringent budgetary control and authorisation of spend will ensure lower overheads and better profitability.
1. We review overhead expense trends against budgets on a monthly basis.
Why is this item important?
Cash is king in any business and one of the key requirements for business success is adequate working capital, i.e. The funds you need to ensure that the business can function. One of the most silent killers of any business is creeping overhead or fixed costs. These costs are ones you must pay regardless of whether you have any income and are very reliant on the correct pricing of the product or service you sell. If the overhead costs blow out without notice it can mean one of two things. It could mean that valuable cash is being diverted away from product or service production, for example you may rely on an amount of cash being available for wages or stock purchases and it is possible for costs you don’t pay that much attention to eat into ear marked money. Or your break even point may have blown out because of rising fixed costs and this could reduce your gross margins and potentially send you into a loss position that you weren’t expecting.
How can I tell if I meet this item in my business?
You would know if you are meeting this checklist item if you regularly produce and analyse actual vs budget reports and pay close attention to large variances between what you expected and what actually happened. This should be done at least quarterly but monthly would serve you much better.
What do I need to do to meet this item?
Ensure you have reasonable budgets set for the year on a monthly basis. Ensure you have a report available that can easily show you the variances by period and year to date. It would also be very helpful if you had a forecast report that would project into the remainder of the year showing you the impact of any variances that have already occurred.
2. We ensure that our overhead costs are recorded in the time period in which they are incurred.
Why is this item important?
Understanding when the various fixed costs occur will allow us to manage our cash flow and plan to ensure we have enough cash available to meet our obligations. If we don’t do this we could have a shortage of cash that could have impacts such as electricity supply cut off, phones not working or even create debt with regulatory bodies that could potentially lead to liquidation. Expenses recorded in the wrong period could impact tax planning or even misrepresent the viability of a business if preparing for sale.
How can I tell if I meet this item in my business?
Review of summary costs regularly through the P&L report and comparison to the budget to see variances in time frames. Have a reasonable knowledge of when fixed costs are to be incurred and have this represented in a budget.
What do I need to do to meet this item?
Monitor actual costs versus budgets and investigate variances. If using software for accounting, lock completed periods to disallow any further processing in that period. Have process of review of prior period information to ensure that no changes have occurred since the close of the period.
3. We regularly (at least annually) review the opportunity to outsource work which is not core to our business.
Why is this item important?
If you knew that having someone else do something for your business that would save you time, money and headaches would you consider that a worthwhile use of your cash resources? All businesses need to think across a broad scale of operation items and generally, the business owner will be an expert in the product or service that they sell and probably have very little knowledge or experience with the myriad of other things a business needs to do to operate and survive. Apart from the successful operations of a business that support the sales activity, all businesses have some recording responsibilities and compliance obligations that must be met in order to stay compliant with the various governing bodies. It would be valuable to know what the operation weaknesses were, understand what outside help is available and how much time it takes the business operators and/or employees to perform a task so that it could be assessed against an ‘expert’ providing the service to satisfy a particular task. The other reason this is important is that valuable income generating resource is potentially being used for tasks that don’t generate income and further drain the productivity of the business.
How can I tell if I meet this item in my business?
Scheduled analysis that will review measurements set in place to determine the cost of various tasks within the operations of the business. Have these reviews regularly and they should coincide with budget reviews.
What do I need to do to meet this item?
Set KPIs for tasks under review that will allow monitoring of the cost of the task against it’s value to the business. These could be dollar costs but also time costs, for example, if a task took half the time to achieve would that mean that the business was better prepared for the outcome of the task. A good example of this is having a BAS Agent prepare your books and process more quickly giving the business a larger time frame to plan for the cash needed to pay for the debt. Further to that, it would also help to understand what the resource under review could be applied to for a better outcome if it were available and would that have a better impact on the expected results.
4. We regularly (at least annually) review indirect staffing costs to ensure they are adding value to the business in the work they are performing.
Why is this item important?
Indirect staff are people employed by the business wo do not directly work on the product/service offering. These are people like receptionists, accountants, supervisors and middle management etc. These are the roles that are needed by the business to perform and support the main income earning activity but they do not add direct value to the product/service offering. It is therefore essential to review the employment of such roles or merge them or outsource them so as to reduce overheads.
How can I tell if I meet this item in my business?
Implementation of a mechanism to see the utilisation of the indirect staff.
What do I need to do to meet this item?
Keep an eye out for what the indirect staff are doing during the day. Analyse the time they are required for, which may be cyclical. Analyse the skill and timing of the required work and see if these can be merged into lesser heads. Keep a track of the number of phone calls received and the volume of transactions processed. Having better engaged workers may reduce the need for supervision.
5. We regularly (at least annually) monitor phone, and power and other overhead costs against the current prices available in the market.
Why is this item important?
An astute business person should always be looking for the best deals on offer to maximise their margins and in the current climate of fixed costs, competition for consumers means that there are generally reasonable deals available. As long as there are no penalties for changing suppliers for your fixed costs, why wouldn’t keep an eye out for something that will benefit the business and contribute to better margins. While your fixed costs are always going to be there it would be crazy not to take advantage of better pricing when you can get it. The type of service can change significantly as well and it is possible to get a better result for a lesser price. Understanding the changes in technology and what benefits it could provide are also important items to monitor for potentially better operations.
How can I tell if I meet this item in my business?
Scheduled analysis that will review what is available compared to what is currently paid and/or used. This review should coincide with budget reviews.
What do I need to do to meet this item?
Monitor actual versus budgeted costs and research into current offers available. Comparison of the two along side known requirements for the overhead. Research into innovation in the overhead areas would also prove beneficial.