This Lesson introduces Overhead Cost Reduction opportunities. Overhead Costs are also referred to as Fixed Costs; depending on how your accounting system is set up.
Note: Gross profit – Overhead Costs = Net Profit
These are the expenses of your business that do not vary, to any great extent, with the amount of production or sales that you undertake.
They include things like permanent staff, rents and finance/loan repayments.
You may be able to immediately reduce or change some of these fixed costs.
This will stabilise the business and get it back onto a path of sustainability.
Reasons for Costs Change
Comparing the accounting figures from two periods will give you an idea of the effect changes in Overhead Costs will have.
Compare Rental figures over 2 years.
Year 1 – Rent = $1,000
Year 2 – Rent = $1,500
Rent has increased.
Allow for changes in Income, through increased or decreased sales, by using a ratio.
Year 1 – Overhead Costs of $100 divided by Revenue of $1,000 = 10%
Year 2 – Overhead Costs of $120 divided by Revenue of $1,500 = 8%
We can see that Overhead Costs, as a proportion of sales Revenue, have dropped (a good thing).
If the percentage had gone up, Overhead Costs would have increased more than proportionally to Revenue. This means that the business is dragging along extra costs that exceed the improvement in Revenue.
Your attention is immediately drawn to looking at what caused the costs to worsen.
- Go to your financial statements and take out all Overhead Costs.
- Work out the ratio’s as above.
- Look at the changes in the ratio for the individual cost categories (e.g. rent, finance, labour).
- Say the labour ratio improved by 3% between the years but the rent ratio worsened by 5%. Rent is your problem, not labour.
- Now work on the areas that are worsening the most.
This type of analysis can lead to Overhead Cost Reduction. It is worth running periodically. The TrendBoard analysis system is the tool to do this.
Go to the Diagnostic link below and search for articles related to the area/s that need improvement.
For more help understanding any issues relating to this Section of the Turnaround90 Campaign, use the 12Faces Diagnostic System to drill down to root causes of problems and find our suggested Treatments.