Smell The Overhead!
Right after I joined the company, I realized the owner was strange.
Monday through Thursday the dress code was suit and tie; Fridays were “casual day.” That was company policy.
What did this guy do? Monday through Thursday he dressed casually; Fridays he wore a suit and tie.
As the boss he could dress how he liked, but no owner I had ever known acted like this.
The previous owners I worked with dressed according to what they had approved for everyone in the company.
One time he walked into my area of the office, stopped so everyone could see him and then began to loudly sniff the air.
He did this several times, gaining attention, and then announced, to all watching and listening, “Smell the overhead around here! Smell the overhead around here!” Then he returned to his office.
I saw the profit and loss statements for the company, and was held responsible for the profits and costs of some of the product lines.
It did not take a lot of button pushing on a calculator to see that gross profit margins were under pressure and that overhead was out of whack.
Sales had taken a hit because of the rash comments the owner had made to major clients, essentially insulting them, and they has moved some business to a competitor.
New products were being invested in but were not yet ready to be sold, and so there was both profit pressure and tightening of cash flow.
The boss never once had a meeting with his management team to review the financials.
He never laid out his expectations for revenue, gross profit margins, overhead expense and net profit.
Money was spent in his company as he determined it should be spent.
If he overreached in the hiring of professional staff, either by hiring too many people or by paying them more than he liked, his employees paid for it by being subjected to immature behavior or by an arbitrary decision to eliminate the position.
After witnessing these odd behaviors and encounters, I nicknamed him “Psycho.” I refer to my tenure at his company as “my stint at the asylum.”
This particular owner thought that overhead was the enemy of profits; he looked at people on the payroll as money that was coming out of his pocket.
He should have been asking himself how he could coach people to greater productivity and to seek their help to increase revenue, cash flow and profits. But those discussions never took place.
A far better focal point for any owner wishing to increase profits is to focus on the gross profit margin of the products and services that are sold. That is the number that determines how efficiently the product is made or the service is delivered.
Every company needs to keep overhead in check. Often, companies look for the obvious and do their best to eliminate those expenses quickly and hopefully, permanently.
I have found that overhead does have a way of creeping back up unless strong controls are put into place. Managers scream for more people even though the financial results of the positions are never defined.
But when a company focuses on how they can do the job of delivering what they promise to customers faster, better, and perhaps less expensively, the savings are not only seen short-term; it lends itself to continual improvement in this area, and the company reaps the benefits of this focus long term.
Are you in business for the long term? Improving gross profit margins will help you be successful both today and tomorrow.