Expense Control Engine: The Overhead Costs Routine
Why This Routine Matters
The Overhead Costs Ratio (OCR) is your weapon against “cost creep”—the slow, silent increase in fixed costs (rent, subscriptions, salaries) that eats away at your hard-earned Gross Profit. This routine isolates how much of every sales dollar goes to administrative and operating costs, helping you ensure your business is running lean and every expense is justified.
Monitoring Frequency
Quarterly: Perform this routine for review.
Annually (Recommended): Use the quarterly data to set an annual reduction goal for this ratio.
Ratio: Overhead Costs Ratio (OCR)
This ratio measures the portion of every sales dollar consumed by fixed operating expenses.
Step 1: Calculate Your Overhead Costs Ratio
A. Find the Inputs
Net Sales: Total revenue for the quarter. (Found on your Income Statement).
Operating Expenses (Overhead): The total of all non-COGS expenses (e.g., rent, utilities, insurance, administrative salaries, marketing, etc.) for the quarter. (Found on your Income Statement).
B. Calculation
Example: If Operating Expenses are $30,000 and Net Sales are $100,000, OCR = $30,000 / $100,000 *100 = 30%
Step 2: Interpretation and Trend Analysis
| Result & Interpretation | Action Trigger | Trend Analysis |
| Stable/Falling OCR (GOOD): Your fixed costs are shrinking relative to your sales. This signals scaling efficiency. | Maintain: Your growth is outpacing your administrative burden. | Look for a Falling OCR. This is a Positive Trend—you are getting more sales bang for your fixed-cost buck. |
| Rising OCR (WARNING): Your fixed costs are consuming more revenue without a corresponding increase in profit. | Immediate Action Required: Cost creep is in effect. Your business is becoming less efficient to run. | Look for a Rising OCR. This is a Negative Trend—your business is becoming bloated or inefficient. |
Step 3: Remedial Actions (Fixing Cost Creep)
If your OCR is rising for two or more quarters, implement these remedial actions:
Subscription & Admin Audit:
Action: Perform a check on all software subscriptions and recurring administrative costs. Cancel anything no longer in use.
Action: Negotiate a lower rate for high-cost services like insurance or utilities.
Staff Efficiency Review:
Action: Review non-revenue-generating staff roles to ensure their contribution justifies the cost. Can tasks be automated or outsourced more cheaply?
Rent/Overhead Negotiation:
Action: If possible, explore options to reduce office space or location to slash this fixed costs.
Turn this into a Routine
We want to make this a regular Routine for your business in order to ensure your financials stay healthy.
This sort of Routine lends itself to a simple spreadsheet so you can;
- calculate the results for the selected period
- see at a glance if the results are improving or worsening over time
- take any remedial action required and monitor if that works
If you are familiar with spreadsheets, you can automatically insert so-called ‘Traffic lights” by colour coding Bad (red), Watch (yellow) and OK (green) to instantly catch your attention if results change. See our template spreadsheet that does all this
This article was provided by Scott Williams AO FAIDC. It describes the way best practice in many management areas has been brought together in the 12Faces GamePlan System. The Goal is to provide an easy to use and repeatable “flywheel” to improve small business owners’ outcomes. Scott is the Founder of NFP small business support services 12Faces and MentorSME and has a Philanthropic Foundation supporting students in education. Scott’s business Petals Network was National Small Business of the Year and 4 times in the Top 100 Fastest Growing Australian Businesses LinkedIn