Corporate
overhead, if unchecked, can eat up your profits and potentially create a net
loss before you realize it. Without a breakdown of your costs into production
and overhead categories, you might not realize how much you’re actually
spending to run your company. Detailed financial reporting and budget variance
analyses will help you keep your overhead to a manageable level.
The costs
you have to run your business and sell your product make up corporate overhead.
These are expenses you have even when you aren’t making your product. They
include expenses such as rent, marketing, phones, insurance, administrative
staff, office equipment, interest and supplies. Like corporate overhead,
departmental overhead includes expenses you have when you’re not producing your
product, but they apply directly to one department. For example, machinery
maintenance is an example of departmental overhead.
The first
step in determining your corporate overhead is to identify it. If you don’t record
every expense you have on a budget sheet or other financial report, do so.
Start by creating production and corporate overhead reports. Production
expenses are costs that apply directly to making your product, such as
materials and labor. Next, break down your corporate overhead by function, such
as marketing, human resources, information technology, office administration
and sales.
Give each of
your managers the list of overhead their department generates. Ask them to look
for ways to reduce their spending without sacrificing productivity, efficiency
and quality. Your department managers might be the most knowledgeable about how
to do this. If you don’t already do it, have your department heads submit an
annual budget request each year. Labor is often one of the largest costs of any
business; have department heads compare outsourcing versus in-house staff for
various projects and positions to determine if they can find cost-savings
opportunities.
