21 May Identifying Overhead Creep
Overhead creep is subtle by its very nature; you may not notice it at first, but over time, overhead creep can take a significant bite out of your profitability. In some home service trade companies, it can lead to major cash flow problems.
But what is overhead creep, exactly? Essentially, it’s the gradual increase in your operating expense. Most business owners will find that, the longer they are in business, the costlier it becomes for them to keep their company up and running. If you’re not aware of overhead creep—if you’re not actively working to control costs—that’s when the problems arise.
The Causes of Overhead Creep
There are a number of potential causes of overhead creep, but let’s start by ruling out some of the things that probably aren’t causing the problem. Fixed expenses—things like your rent or your insurance, which should remain fairly static from month to month—are seldom at the root of overhead creep.
What you have to watch out for are the variable expenses. The most common of all is payroll. If you have too many employees for your volume of business, that’s sure to cause overhead creep, resulting in cash flow obstruction. If that’s the boat you’re in, it’s imperative to trim your payroll costs wherever possible, without compromising the efficiency of your team.
Closely related to this is overtime. If you’re required to pay higher rates for overtime hours, then it’s vital to control these extra working hours as best you can, perhaps by staggering your employee shifts throughout the day.
Equipment and supply costs are ever-changing. Have a process in place to review pricing on the key equipment and supply costs on a monthly basis. Don’t assume the price of something is the same as the last time you purchased it to be resold. Actively review and negotiate with your suppliers to make sure you are getting the best prices available in your market.
Why Overhead Creep Matters
Overhead is one of the key factors you consider when making your budget and when pricing your jobs; indeed, every job you price should take into account overhead as separate from the profit you’re going to set aside. So, if overhead increases and your prices don’t reflect that, it directly impacts your profits.
We’d love to sit down with you, look at your pricing and your operating budget, and help you get to the bottom of any cash flow problems you may be experiencing. To speak with one of the accountants and Profit First professionals at Contractor in Charge, reach out to us directly.