Traditionally, direct costs are easy enough to determine: Tally up the charges for materials, equipment and man hours and watch the costs fluctuate by monitoring each job.
But overhead is dicier. It’s easy to overlook the small things, or to take on an unplanned cost without realizing how it affects the big picture.
However, managing these costs is crucial to your planning. “Overhead is a strategic tool,” says Grant Mazmanian, president of Pinnacle Group, a business consulting firm in Media, Pa. “It’s the centerpiece of the business for small business owners.”
Here, veterans provide advice on how to ensure your overhead remains under control.
Leave nothing out.
When figuring out overhead, include everything – even seemingly incidental items such as light bulbs, toilet paper and coffee. “There was a time when we didn’t know a lot of our soft costs that aren’t necessarily quantified by bills and invoices,” says James Atlas, president of Platinum-Poolcare Aquatech in Wheeling, Ill., a Pool & Spa News Top Builder. “Now we know every penny that’s coming in and going out of this building.”
There’s also one large expense you may not consider as overhead – the company owner’s pay. “Some owners never factor their salary into it,” Mazmanian says. “They figure, ‘Well, what’s left over is mine.’” Instead, he recommends, determine a salary for yourself and count that as a cost that must be covered.
As the year progresses, you may have to adjust that number along with others. But plan it out and proceed toward that goal, as opposed to letting things fall as they may and taking home what’s left.
Other miscellaneous costs that must be covered include planned advertising, as well as the earnings you earmark for contingencies such as new trucks and equipment.
Accurately account for shared labor.
Many pool businesses have employees who work across different departments. Though it’s convenient to divide their salary costs evenly across construction, service and retail, resist that temptation.
For instance, when Dan Essig operated a service division, he noticed how unbalanced his receptionist’s time was. “The service routes brought in much less revenue than new construction, but [the receptionist] spent more time talking to those service customers,” says the president of Essig Pools in North Miami, Fla., a Pool & Spa News Top Builder. If he’d divided her salary evenly among the departments, it would have put an undue burden on construction and misrepresented how his service division fared.
For office staff and others who work across departments, determine what percentage of their time is used for each, then assign costs accordingly. “Even though maybe [its] revenue was 5 percent of our new construction revenue, I might charge 25- or 30 percent of [the receptionist’s] expense to the service department,” Essig says.
Monitor and revisit your costs often.
Especially at a time like this, costs versus earnings have to be compared almost constantly to make sure they’re on track.
They should be monitored at least monthly. Builder Ken McKenna checks often to determine what percentage of his company’s total revenue went toward covering overhead. He compares that with the average profit that month. “If my gross is 20 percent, then my overhead to revenue better not be more than that,” says the president of Tampa Bay Pools in Brandon Fla., a Pool & Spa News Top Builder.
Analyze any unexpected overhead expenses, whether a truck needed new tires or a planned expense increased. “If [an overhead cost] out of the norm pops out in a month, you need to find out why and figure out if it will come back or if it’s a one-time thing,” says Larry Duffy, CEO of Cameo Pools in Mesa, Ariz., a Pool & Spa News Top Builder. “If it’s going to come back again, then you’ve got to factor that in.”
To cover expenses that have permanently increased, you’ll need to make adjustments.
Some months are busier than others, and occasional one-time costs spring up. To account for these, Mazmanian suggests using averages as a gauge. “You can take a three-month running average,” he says. Do this each month. When you see it go up or down, you’re probably looking at a trend.
Constant monitoring is especially important during this time because the other side of the equation – namely, how much product you expect to sell – remains unpredictable and seems to change continually.
“A big part of it is based on a budget of how many pools, renovations and what kind of service we anticipate doing in the course of the year,” Essig says. “So we actually changed our budget multiple times in the last year.”
Follow your plan to the letter.
Mazmanian has noticed a common attitude among small business owners – across many industries. This mindset says it’s OK to overshoot overhead projections by a few percentage points here and there.
He doesn’t see it that way. “You should assess your overhead, not estimate it,” Mazmanian says. “There’s a difference. Assessing it says, ‘Here’s what it is. There are certain areas where we’re going to allow deviation. But we’re allowing that.’ When you’re coming from an estimate, you’re going to come to something close, but you still don’t have a handle.”
Managing overhead is not a game of horse shoes. It’s not enough to come close. You have to stick with your cost projections, or make appropriate adjustments in your income.