Everyone always talks about the rent, perhaps because it’s a big percentage for individual households, but for most office based businesses it’s usually about 5% of sales.
The biggest costs are always related to providing service to your clients, around 60% of sales is common. 20% can be spent on getting new clients. The rest, what accountants call overheads, can be as high as 20% with rent included. The eagle-eyed amongst you will notice a problem, those numbers means not much is left over. It might surprise you but a lot of businesses run that way. A whole heap of work for not much. What staff can think is penny-pinching is often just survival tactics, making for a miserable experience for everyone involved.
The secret to healthy profits is to keep overheads low, and margins high. Easier said than done I know.
What is meant by margins in this case is sales less the direct costs of service delivery, costs like your operations staff. It is a measure of efficiency. Overheads don’t relate to operations directly, they are the costs you incur just keeping the lights on.
Old fashioned cost accounting “allocated overheads” based on labour hours. Unfortunately lots of costs get processed as overheads and loose relevance. We think a better way is to go about it is to split up what you are spending the money for, not what you are spending it on.
Sales and marketing costs are very different to your payroll & HR costs. It’s can be extremely difficult to work out what sales and marketing costs give you value for money but, whatever your ratios, cutting any of it will probably hurt sales now or in the future. Make sure you track your Cost of Customer Acquisition and Lifetime Customer Value.
Payroll is a “hygiene factor”, no amount of good payroll will make you profits, but get it wrong and it might wipe you out. Payroll and HR are just some of the many costs involved in keeping your people available for work. Some directly benefit the employees like superannuation, but many don’t, like stupid payroll tax. When you think about it, an office is just a place for your people to work. Rent is a sort of on-cost. So is the senior leadership team. So is technology. They only exist to support your people.
A better way to account for these types of people related expenses is to add them all up, call them on-costs, and then allocate them, along with the people costs, to a group for each reason you spend money. The groups that show what you are spending the money for, not on:
- Service delivery & support (including invoicing and collections)
- Sales and Marketing
- R&D
The expenses left over will be for things like insurance and tax accountants fees. Try to minimise them.
Often the “back office team” are treated as an overhead. Again, it depends what they are doing, but if you have a bunch of people that are genuinely overheads and not supporting your people. It might be time to find out what they do and try to restructure it.
Looking at these issues for clients is what we do. Hit me up for a chat.
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