“Overhead, like the government, tends to just grow and grow. Reducing overhead takes incredible discipline and a willingness to risk civil war with all affected employees.”
Overhead Is a Threat to Your Survival
A low-cost structure is essential for being competitive, and low overhead is part of a low cost structure. Overhead costs don’t directly make your product or deliver your service, and they don’t directly benefit your customer. Overhead just adds to your cost structure and makes you less competitive. The more overhead grows, the harder it is to see its benefit. Once you add an expense to overhead, it’s hard to take it away.
Unfortunately, too many employees love overhead! They love nice desks; they love new computers; they love new buildings; they love deep carpet; they love nice offices. But all these trappings of success are just that—traps—and each and every overhead expense threatens every company and every person that works there.
Get Rid of the Office
There was one move that I put off making for several years that chopped our overhead to shreds and gave us a huge competitive advantage. I delayed moving to a commercial office.
For four years, I operated my book publishing business out of my basement apartment. This wasn’t just a one-person office—I had up to seven people working there. We also used it as a warehouse—I’d have neighbors move their cars so that semitrailers could back down the driveway, and I’d open the large kitchen window to load books in and out. I remember one night waking up to find that a pile of boxes with books had fallen on top of me while I slept.
My MBA friends laughed at this low-budget business setup, but they didn’t laugh once I had built it into one of the largest independent book publishers in the U.S. with a total equity investment of just $2,000.
Don’t Get Seduced by Technology
It’s incredibly easy to get seduced by the latest advances in high technology and expensive equipment that you may not need, or at least could make do with a cheaper version.
Years ago, when I was running a busy newspaper sales office, I was shocked to see how expensive multiline phone systems were. So, by our reception desk on the first floor, I installed six single-line phones for incoming calls and six matching extensions on our second floor, along with an intercom to announce incoming calls. It looked crazy—something like a scene from an old 1920s movie! Very crude and appallingly unprofessional, but it worked and saved us a lot of money.
Right around the same point in the 1990s, the backbone of our accounting system was an ancient IBM system-36 computer. My tech friends thought I was operating a museum, not a business! But I was a lot less embarrassed about this relic in our office when I saw one in operation at one of the leading wholesalers in our industry. And wholesalers, even large ones, usually have made a science out of controlling costs; they live and breathe on that tiny profit margin between what manufacturers allow them and what retailers are willing to pay.
Try Selective Upgrading
Computer systems and related software can be a significant expense for a growing small business, and even for a larger one. Often, a firm will decide to unilaterally upgrade all of their PCs and software. But there is very little volume savings on computers, and usually not too many savings on software. In fact, I’ve seen some software site licenses that are more expensive than buying multiple copies off the shelf.
So, I would suggest that you pause when your employees press you for the latest computer systems and the latest software upgrades. Besides, there is a huge hidden cost to upgrading computer systems and software. First, you have the new learning curve. Then you often also have the “fresh new problem time” as you get used to the new systems.
But don’t skimp by not buying the appropriate software licenses. You could be subject to massive fines and embarrassment if you don’t have a software license, not just for each package, but also for the computer that the software is installed on.
Turning Garbage into Greenbacks
Most companies spend a lot of money getting their waste hauled away. But my book publishing business eventually made a lot of money getting its waste removed! I would love to tell you that this was a result of my brilliant insight, but that would simply not be true.
As we went through one of our perennial cash crunches, I got everyone together and said, “Don’t panic, we’re not going to cut jobs, but we do need everyone’s help to cut costs. And we’ll give some small cash awards for the best suggestions.”
Well, sure enough, most people panicked anyway and told one another that we were about to go out of business. But, they still liked the cash award idea, and we got lots of great suggestions, including the “money from wastepaper” plan from some of the hourly guys in the warehouse. These fellows directed us to a paper converter that would not only pick up our paper waste for no charge, but would also pay us thousands of dollars for it.
Of course, another great lesson here is: don’t underestimate the potential of your staff just because they happen to currently hold one of the lower-paying positions. If you can create the right framework and environment, you might be amazed by how much people want to contribute and how much they can contribute!
In controlling costs, you do need to get employees on your side. Make sure employees celebrate that you have a low cost structure, and celebrate some of the rewards with them. I’d much rather pay cash bonuses to employees than pay a penny more than necessary to an outside supplier!
Takeaways You Can Use
- View overhead as your enemy; attack it constantly before it defeats you.
- It’s better to have cash in the bank than the latest and greatest office equipment.
- Enlist your employees in the war against overhead.