Overhead - Friend or Foe
So much is made of overhead costs in the green industry by many contractors. My question is, why? Contractors often regard overhead like a weed, pest or disease that must be eliminated as opposed to a resource needing management. Newer or small contractors tend to feel they have no overhead, and use that thought as a reason to charge dangerously lower prices than more established companies.
Your company’s expenses break down to only two basic categories. They are fixed and variable, or also known as overhead and production expenses. Production expenses can be further broken down into major sub categories of labor with all attached payroll rated insurances and employer payroll taxes, subcontractors, material and equipment. When you begin classifying expenses this way, and tracking production payroll hours, your real cost of putting crews on the street comes into sharp focus.
What is the definition of overhead and what are some of the costs that are in it? The answer will differ from among contractors and accounts. Here is my take which worked well for me for decades. Overhead is business expense that is required to keep your doors open, and generally operate office or support functions. These expenses cannot be assigned specifically to any revenue generating activities or job.
Overhead is a necessary part of a business, and the costs still exist when sales levels are low or nonexistent, and may not jump much if your sales rise 10% - 15%. However the cost of overhead can be substantial, which is why you want to monitor how much you spend.
Examples of overhead expenses are as follows:
Professional services like accounting and payroll preparation
Office staff salaries
Paper and ink
Insurances – some say, but I will argue that below
Vehicles for management and sales staff
Software and computers
My business did not include insurance in overhead except for office staff. That is because liability insurance is related to sales and payroll. It floats with sales and work volume just like your fuel consumption. It should be tied to labor expense because it is payroll rated. Production equipment costs, like trucks, tractors, mowers, trailers etc. including insurance, fuel, repairs and depreciation are related to producing revenue, so they do not belong in overhead. That is because these assets can be sold in down times to eliminate any debt and the cost to maintain and insure even if they are parked.
What does this mean to you? Overhead is not to be totally avoided as if it was a communicable, killer disease. Overhead is the engine that powers your business. It covers your marketing, accounting software, scheduling and client job management software, professional education to stay abreast of industry regulations, equipment and technology advancements, and continuing education credits for permits and licenses.
With overhead, you can even have your customers pay for your trip to attend those state and national trade shows and educational sessions at their expense and benefit. If you are a beginner in business or with not many years of experience, you need to budget for overhead even if you are not yet incurring costs in all categories. This is important to you because, budgeting for nonexistent overhead, then estimating or using historical payroll hours, you can establish prices that include a profit as a line item for your services. That allows you to grow without giving customers sticker shock when your operating expenses actually go up. The budgeted, but not spent money you take in, can be used to fuel your business for growth.
Expenses you fear may be desperately needed for a larger facility, someone in the office for phone calls, bookkeeping and other clerical and inside sales tasks, acquiring field service software to facilitate price quotes, production, billing and credit card processing are already covered by your budget and overhead recovery based pricing. Overhead is your friend when used wisely to support, grow and enhance your business. Overhead is only dangerous when you do no know how much it costs you per man hour of production work and you do not build it in to your cost of production.
A recent conversation with an area manager for a national green industry distributor revealed how much contractors will quibble over 10-25 cents per bag on fertilizer, while their crew sits in the truck for 20 minutes. Many irrigation contractors drive to the supply house with their install crews, or send service techs several times per week to stock their trucks. Mow crews of 2 to 6 members will leave the yard, hit the gas station and a convenience store, then off to work. What time does your crew check in for the day and when to they arrive at their first job? How many wasted hours accumulate every week times your average wage per hour, plus employer taxes and all insurances that are payroll rated like unemployment, social security, liability, workman’s compensation? Those are big and variable dollars compared to managed overhead.
Focusing primarily on your overhead, which in a well run company is invariably much less money than inefficient use of your production labor, is shortsighted. Why am I telling you this? If you are skipping field service management software, educational and networking opportunities at major industry meetings, technology purchases that could improve efficiency or sales, marketing investment, or help in your office, you are cutting yourself out of real growth and increased profit.
How are you managing overhead or using it to drive your business? Call me today for a FREE 60 minute consultation and let’s start increasing your profits tomorrow.
Harold Fox 850-972-9301