10 WAYS TO BOOST YOUR COMPANY’S VALUE: Practice #6: Reduce overhead expenses


Practice #6: Reduce overhead expenses

 One bright spot of the economic downturn is that it has forced many companies to look more closely at where overhead SG&A expenses are being spent. This is not simply headcount, but other indirect costs as well. The key metric to benchmark in a review of overhead expenses is how they compare to that of similar competitors.

 In an overhead review you should look for how well you have empowered managers to cut costs in each department and how well your company communicated guidelines and rules to enforce a discipline and structure to validate and verify overhead spending per department. There is a very good whitepaper from Kaiser Associates (http://www.kaiserassociates.com/wp-content/uploads/SGA-Optimization-Whitepaper_06.02.08.pdf) on SG&A issues to consider and how to structure your organization to better manage and control overhead.

 SG&A is not easy to reduce without first studying the impact on other functions of the business. The key point is to understand how SG&A drives profitability and then to establish benchmarks to measure progress each period. As many as 90 percent of companies who institute SG&A cuts, fail to sustain their cost-cutting three years after the cuts were implemented. The reason is that after sales and profits improve, many companies let new costs creep back into the mix. A best practice is to retool your company culture and develop a savings mindset that penetrates all areas. Encourage staff to think of costs as their own personal ROI value to your bottom line, rather than as benefits, perks and corporate freebies they deserve.

 Middle market and smaller companies can implement a cost conscious culture more easily than larger firms simply because of the personal touch smaller business owners can display in their own actions.  Employees want to see management is “walking the talk” when it comes to sharing the pain so to speak.

 Employee Stock Ownership Plans (ESOPs) have also been shown to increase employee awareness of expenditures for SG&A and to profitability when effectively implemented. If you would like to see how ESOP’s can work for you check out the ESOP Association: (http://www.esopassociation.org/about/about_association.asp).

 The bottom line on reducing SG&A expenses is to give every worker a stake in the outcome. Reward them for creating new ways to reduce costs and developing, over time, a culture that emphasizes thrift over spending. You will know you are on the right track when an employee asks “why are we spending money on this…”

 In part 7, I look at financial performance ratios.