Increasing Cash Flow Part Three - Overhead
Unless you’ve been living under a rock lately (and by that, we mean not reading our recent mailings), you know that shiny red buttons are out and levers are in. Shiny red buttons are quick fixes and careless risks. Levers require precision — and just a bit of elbow grease.
There are three levers that you can pull to permanently increase the amount of cash in your company: revenue, gross margin, and sales and general and administrative expenses. We’ve already discussed revenue and gross margin. In the final installment of this three-part series we will focus on sales and general and administrative expenses – which is a long-winded way of saying “overhead.”
Overhead essentially includes salaries, commissions, bonuses, benefits, power, heat, travel, entertainment, and sales expenses. It’s a very inclusive category, and that makes it difficult to generalize tips and tricks. Fortunately, we’ve been around the block a few thousand times, and we’ve compiled some essential rules of thumb for the overhead lever:
Rule #1: Cut carefully
Hey, you with the giant red marker, ready to cross things out. Put the marker down! No slash-and-burn tactics here, folks. While it’s true that increasing cash flow in this category does mean cutting expenses, it’s critical to think about long-term impact. When it comes to overhead, we see far too many companies behave in ways that are penny-wise and pound-foolish.
The easiest cuts are usually the ones that have the smallest amount of immediate impact on the company’s success. Unfortunately, these are often the cuts that will do the most long-term damage.
Consider training or marketing. Good training or marketing campaigns produce results. It might take a while for these campaigns to show up on the bottom line, but if you cut them, you’re slashing future income potential. It’s important to understand the difference between resources that are “fat” and resources that are “muscle.”
During the economic downturn, we witnessed a lot of companies making unilateral cuts. Everyone in the company received a flat percent pay reduction. We don’t advise this approach. Why not? The answer is harsh but true. Some people are muscle and others are fat, and losing that muscle can be very painful.
Rule #2: Consider capacity
Here are a few questions to ask yourself.
How much more can your current system absorb? When sales increase, where are the ripple effects felt first? Where are they felt next? Is it human resources? Administrative support? Estimating? Shipping? Engineering?
Do you need a bit more muscle? If so, how much? At some point, “step-functions” come into play for nearly every business. What do we mean by step-functions? For example, you may need to hire a whole person even though you need a half of one (we will resist the temptation for a joke about cutting people in half; that would be in extremely poor taste). Hiring more resources than you need — even muscle — gets expensive until you use up that extra capacity.
Rule #3: Only pay for what you need
Some expenses can actually be added “as needed” or outsourced. It’s possible to outsource or hire “fractional” employees for virtually every aspect of your organization: engineers, sales people, communication and marketing staff, accountants, etc. Cost-savvy businesses are increasingly finding ways to hire or outsource to someone who is only there to provide the specific level of service the business requires — not simply to sit in a chair for 40 hours per week.
Rule #4: Add carefully
Some businesses conflate expansion with success. Not so fast.
If you think you’re ready to add resources, first take a critical look at why you are adding, and the ultimate P&L upside of your potential addition. If you are adding a marketing or sales assistant, will that person actually free up the sales team to go on more sales calls and generate more revenue? If there isn’t a compelling impact to your bottom line, you may want to revisit your logic and save your money for more critical investments.
One of the best ways to gain a macro view of your business is through SG&A Reporting.
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