Those who have known me for several years may remember me as being quite a bit heftier than I am today. My weight gain did not happen overnight. Five pounds here, three pounds there, and eventually I was carrying 60 pounds more than I needed.
Overhead expenses in a business can creep onto the income statement in the same way that my weight did on me.
Overhead expenses are those fixed costs that happen every month whether you sell anything or not. Overhead includes staff salaries, such as bookkeepers, sales staff, supervisors and managers. It also includes expenses such as rent, loan payments, leases, cell phone bills and so forth.
Entrepreneurs must pay attention to overhead, as these expenses are what determine break-even for their company. Your business will get to break-even when the profit you make selling a product or providing a service is enough to cover your fixed expenses. If you make a profit of $1 after paying for materials and labor, and your overhead is $10,000 a month, you have to sell 10,000 units to break even. If you can lower overhead to $5,000, it will take sales of only 5,000 units a month to break even.
Over time, overhead grows one decision at a time. When you make the decision to hire an extra bookkeeper, add another cell phone for your staff, or rent space to house your business, it increases your monthly overhead. And with each increase in overhead, you have to sell more units to reach break-even.
I made the decision to lose weight because I had a wake-up call from my doctor. If I did not lose weight, then I would need to begin to take medication to lower my cholesterol and reduce my blood pressure. Most small-business owners got their own wake-up call when the recession hit. They had to cut their overhead or risk going out of business.
Just like losing weight, cutting overhead can take a long time and involve many hard decisions. And remember, the income you personally take from your business is often a key part of your overhead. Cutting your own personal budget may be a necessary part of the equation for reducing the overhead of your business.
Now I watch my weight because I know how hard it will be if I have to lose it all over again. Think of each addition to your monthly overhead expenses in the same way.
Should I eat that extra dessert? Nope -- the pain of losing the weight it puts back on me is not worth it. Should you add that extra expense to your business each month that you can really do without? Nope -- just remember what it took to cut back expenses to make it through this recession.
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