By Sam Ashe-Edmunds, Demand Media
Corporate overhead can become larger than production costs.
Corporate overhead, if unchecked, can eat up your profits and potentially create a net loss before you realize it. Without a breakdown of your costs into production and overhead categories, you might not realize how much you’re actually spending to run your company. Detailed financial reporting and budget variance analyses will help you keep your overhead to a manageable level.
The costs you have to run your business and sell your product make up corporate overhead. These are expenses you have even when you aren’t making your product. They include expenses such as rent, marketing, phones, insurance, administrative staff, office equipment, interest and supplies. Like corporate overhead, departmental overhead includes expenses you have when you’re not producing your product, but they apply directly to one department. For example, machinery maintenance is an example of departmental overhead.
Identify All Corporate Overhead
The first step in determining your corporate overhead is to identify it. If you don’t record every expense you have on a budget sheet or other financial report, do so. Start by creating production and corporate overhead reports. Production expenses are costs that apply directly to making your product, such as materials and labor. Next, break down your corporate overhead by function, such as marketing, human resources, information technology, office administration and sales.
Work With Department Heads
Give each of your managers the list of overhead their department generates. Ask them to look for ways to reduce their spending without sacrificing productivity, efficiency and quality. Your department managers might be the most knowledgeable about how to do this. If you don’t already do it, have your department heads submit an annual budget request each year. Labor is often one of the largest costs of any business; have department heads compare outsourcing versus in-house staff for various projects and positions to determine if they can find cost-savings opportunities.
Create a Purchasing Process
Assign one person to review and approve purchases so that he can see all expenses that managers plan to make before they are paid. Set policies for spending, such as requiring competitive bids for purchases over a certain dollar amount. Have your purchasing manager shop for better deals on common items you buy. Consider offering a bonus if your purchasing agent meets specific savings targets without sacrificing quality.
If you outsource functions or sign leases, rebid your contracts annually, even if you end up using the same vendors and suppliers each year. Rebidding contracts prevents longtime contractors from inflating their fees, or encourages them to offer more services to keep your business. If you haven’t shopped your insurance in the past two years, do so, and discuss with your current provider how to reduce your premiums. Ask your utilities providers to visit your workplace to perform an audit and recommend how you can cut your monthly water, gas and electric bills.
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