How Can You Reduce Your Overhead Costs?
By: Stephen Machin, CMA

The Toronto Star has recently reported the economic outlook for Ontario is dismal.  This especially relates to the manufacturing sector that is still adjusting to a high Canadian dollar and is now dealing with a significant downturn in the U.S. economy. Historically, most businesses have focused their energy on growing the top line and managing your core costs. Unfortunately this strategy is no longer sufficient to ensure that your company remains competitive in this global economy. 

An area that remains largely untouched for many companies are the selling, general and administrative (SG&A) expenses.  These are commonly referred to as ‘overheads’ and while individually they may not seem to be a significant cost, when taken together they can often add up to a major cost to your business.  Simple things such as couriers, uniforms, wireless communication, printing, janitorial, office supplies and insurance can be the source of significant profit leaks for your company.

A study reported that Canadian businesses are leaving as much as $15 billion in unclaimed savings on the table each year because they don’t pay enough attention to how their employees purchase everyday goods and services.  While almost 90% of participants had a purchasing policy in place less than half actual enforced it and 6 out of every 7 companies admitted that their employees spend outside the policy on a regular basis. 

So what can you do rein in employee spending?  Here are three things that you can start right now to get those costs under control.

1. Care about costs – create a culture of caring about every cost regardless of how small.  This must come from the very top and it doesn’t mean lip service.  Show the rank and file by your actions that all costs matter and this will create a culture where employees are always looking for ways to save money instead of ways to beat the system.

2. Benchmark yourself against the competition – you may think that your costs are in line but is this based on wishful thinking or hard facts.  If you are taking the sales reps word that you are getting the best prices then you are likely in serious trouble.  You need to do your homework and compare your prices against your competition or other similar businesses.  Admittedly, this information can be difficult to come by in some instances but without the facts you just don’t know where you stand.

3. Understand your buying patterns – many businesses do not take the time to really understand their requirements and buying patterns before spending money.  For example, do all of your overnight courier packages go out express for 10:30am delivery?  If you looked at each of those packages and asked yourself does it really need to be there by 10:30 or would 12:00 be okay or maybe by the end of the day.  You would likely find that a significant percentage of your packages could be sent out using a less expensive service level.  Also, if you are tendering your business to a number of potential suppliers, providing detailed specifications of your requirements will likely result in much better pricing.  Unfortunately, many businesses leave it up to the suppliers to figure it out and they will build in lots of cushion in their pricing to cover the unknown.

If you just don’t have the resources to look at every cost category internally, consider bringing in an expert.  They will have the ability to analyze your spending patterns and have access to the benchmarks to quickly determine if there is an opportunity for savings.  This is certainly a case where time is money.  The longer you continue to overpay on your overhead costs the longer the hit to your bottom line will remain.

If you demonstrate to your employees that you care about costs and to your suppliers that you have knowledge of the markets and your own requirements you are well on your way to realizing a substantial savings and plugging those profit leaks.