“To increase profits you must fist control your costs.”

Today we look at getting a handle on our overhead costs.

In continuing our preparation for 2015 we are going to look at controlling our costs.

We want to look at our overhead costs. Overhead costs come in many forms but for sake of discussion we want to look at two separate areas, the office costs and the job related costs. To better understand which costs are overhead I look at overhead as any thing that does not contribute directly to the job. For instance, let’s compare a pickup truck versus an excavator on a project to install underground pipe. The pickup truck is used for transportation to and from the job and carrying some tools. It is not necessarily required to complete the job. However the excavator is a most for digging the trench for the pipe installation. In this instance I would consider the truck as on overhead item and the excavator as a job cost.

There are two ways to increase the profits we retain on a project. The first is to charge more for the project, The increased revenue would generate more profit. The second way is to decrease the costs. We can decrease both the costs to complete the project and the overhead costs associated with our business. For now we are looking at the overhead side of this equation.

[tweetthis]To increase profits you must fist control your costs[/tweetthis]

To get a better handle on where we spend our money we need to look closely at our income statement. Hopefully your accountant has your books set up so that you track the different expenses and can sort them out. If not, find a new accountant! If you don’t have an accounting system set up to track this then that should be the first thing you do is start separating your different expenses into accounts so that you can tell where your money goes. For example, how much do you spend on advertising, office rent, utilities, vehicles, gas, etc. If you don’t have this set up yet, you can still get an idea on your overhead by taking your bills and sorting them manually and adding up the totals.

Now that you have all your costs separated into the standard accounts it’s time to start looking at them and analyzing. I recommend using a spreadsheet so you can better work with the data. You should have columns for the description of the account and the amount. Next to that we need to add a column for labeling the expenses as job cost, job overhead or office overhead. In the next two columns we want to add costs as a percentage of total overhead and costs as a percentage of revenue. Once you have them labeled you can sort them by type and from highest to lowest.

Using the spreadsheet we can now see what our top overhead expenses are. Most likely you already knew what those top expenses are but you may not have known exactly how much they were as a percent of total costs or revenue. The idea here again is to have a quick view and with triggers that will stand out like finding out that your gas bills are 25% of overhead costs. Now that you can see these clearly you can start to see which ones need attention. Some of these you may already have good systems in place to manage the costs and are doing a good job with them. There are probably others that will stand out that you are not managing properly.

We want to start with looking at these big-ticket items and making sure we are doing the best we can to control them. Let’s take the gas example above as an example. Maybe in this case you don’t have a fuel management system that you are using that tracks actual use by vehicle. By putting a system in place you may be able to determine that your fleet needs to be updated to more fuel efficient vehicles or possibly your employees have been filling up their personal vehicles at your expense. So we want to get a system in place the manages those costs. If you already have the system for your gas and your vehicle usage is efficient then this may just be a cost we need to live with. So move on to the next group of costs and work on those.

Review each cost line item and determine if you have proper systems in place for each and if you can make improvements. It may help to add another column for System (Y/N) so that you can sort by ones that are already being managed. Armed with this information we can now start to tackle the areas where we can implement better controls and trim these costs.

The key here today we getting to this point. We need to have a good understanding of what our foundation is before we can start taking strides to move to the next level. We will deal with how to make improvements in an upcoming episode.

Take-Action Items:

1. Review your income statement and sort out your costs

2. Research each cost account to determine if you have systems and if you can do better

3. Determine the top 2 to 5 line items that you will start to work on