Remembering the idea behind this continuous improvement lark, it’s about taking small incremental steps on a continuous basis to make big changes to your business, and the key is that the small and continual changes magnify when they combine and flow to your bottom line.
In part 1 you got some ideas for increasing your top line by 1%, last week was about improving your gross margin whether you’re a manufacturer or service business, and in this final part we’re tackling overheads.
Who has time to check overheads?
I tend to find that many business owners are so busy driving the top line forward that they rarely scrutinise the overheads, and they can so easily grow, stealthily, without you really noticing. Especially if your business is growing.
Most businesses waste between 8 and 10% of their turnover on stuff that makes no difference to their business. Wouldn’t you rather have that sitting in your bank? Controlling overheads can be very profitable.
Where to start?
Ask your accounts department to run a nominal activity report for the last 6 months for all your overheads codes. This will tell you every overhead cost in your business. I bet you’ll find you’re paying for something you didn’t know about. Question everything, do you need it, does it increase sales.
When you get your management accounts make sure you can see clearly what you spend each month, and what you spent last year. Beware accountants who group lots of costs together under 1 heading – you’ll never know what makes up those figures, so you’ll never control them.
Why does it matter?
Overheads have a tendency to grow constantly if left unchecked. It’s some kind of weird business law. And overheads eat your profit. Reviewing your overheads on a regular basis means you keep your business lean. Particularly important if other people in your business apart from you can order stuff.
Here are some specific overhead reduction ideas
Manufacturing business
Staffing
- The number 1 overhead for most businesses – look at what everyone does – are there inefficiencies or people you could really do without, or could you do more with the people you have? How have staffing costs grown in line with turnover?
- Do you have temps in the business? Do you need them and if so can you replace with a lower cost permanent person?
- Look at using apprentices
- When recruiting, negotiate with the agencies if you use them
Vehicles & machinery
- Have you got vehicles or machines that are costing down time or money in maintenance, is it time to replace them?
- Do you have machines or vehicles you don’t really need or use, that are not directly bringing in sales – get rid.
- Fuel – are all those trips necessary, do people look for the cheapest place to fill up.
Premises costs
- Is there is any scope for negotiating a rent reduction or rent free period?
- Have you checked if you are paying the correct business rates?
- Insurances – get a broker to take a fresh look – tell them you want to see a reduction
- Look at your utilities tariff, see if you can get a better one, get a broker to look at it, make sure you are turning stuff off when you don’t need it, it all adds up to make a difference.
Phones & broadband
- Look at the phone tariff – tons of competition around, get a better deal.
- Check the phone bill to see if there is anything odd or anyone taking the mick.
- Mobile phones- check what’s being spend, check tariffs, are people going over the plan limits.
- Check what tariff you’re on for your internet connection – is there a better package?
Stationery & printing
- See what is in the stationery cupboard and in people’s drawers. Have a stationery amnesty and get it returned to the cupboard, get new suppliers in – there are loads fighting for the business – say you want a minimum 20% reduction on what you pay. Question everything you buy, stationery is like sweeties!
- Email customer invoices and statements, save ink, paper, envelope and stamps
- Printed stationery, can anything be done with digital to save on the printed stuff
- Photocopiers – this can be an expensive minefield –the wrong copier or wrong contract can cost a fortune.
- Printing – how much do you spend on paper and ink – are people printing when they don’t need to, are they using colour when black and white will do, encourage a paperless office.
- Are there manual paper processes that could be automated, made electronic
Bank charges and interest
- Loans – see if you can refinance on better rates
- Bank charges, see if the bank can sharpen their pencil, see where you are incurring costs and where you could make changes to cut them.
- Pay all staff and suppliers by BACS if you don’t already, get rid of expensive cheques.
- Make sure your customers all pay you electronically too.
- • Look at your professional fees, make sure you are getting real value and they add something to your business that brings in more sales, makes you profit or increases your cashflow.
- Look at your marketing spend, be ruthless about whether it really is an investment.
- Are all those networking events bringing in business?
- How much do you spend on staff lunches, treats, stuff for the kitchen.
- Have a good look at what is lurking in “sundries” (and for the record, hardly anything should go to sundries)
- Look for the pimp factor – spending on things to make you look good or because you think you deserve it.
Try asking your staff for cost cutting ideas. Cost cutting doesn’t mean trouble, it means we are looking to continually improve our profits to make it a better company for everyone – most people can see where the inefficiencies are and where money is wasted.
And finally if you don’t already do so, make sure nothing can be bought without a purchase order being signed by a manager or director, and give people budgets to work to so they can’t overspend.
I really recommend looking at your nominal activity report at least once every 6 months, almost every business I’ve worked with has something going through the bank automatically that they thought they’d cancelled. It’s a great discipline and really gives you a feeling of being in control.