Tag Archives: overhead

When Times are Good

“You look comfortable,” I said.

“Things are going really well,” Jordan replied. “The market is good, new customer count is up, year over year revenues are positive. Yes, things are comfortable.”

“I noticed your accounts receivable ratio to new sales is above your threshold limit. And, that you rented a new warehouse to store some slow-moving inventory. Your revenue-per-employee head count is way down over the past six months. What gives?”

“Hey, when times are good, those things happen. More revenue, more accounts receivable. We set the ratio threshold during the last recession when things were tight, so it’s no big deal. And, yes, we rented another warehouse to give us more capacity. The new warehouse gives us a buffer so if we get a spike in sales, we can cover without having to increase production. But, you are right. I am a little troubled by our revenue-per-employee. It just seems it takes more people these days, and wages are increasing so our revenue-per-payroll dollar is even worse.”

“Jordan, when things are tight, we pay attention, we measure, we make moves. We don’t make our biggest mistakes when times are tough. We make our biggest mistakes when times are good. A little success can create a whole lot of overhead.*” -Tom
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*Homage to Red Scott.

Breeding Overhead

“I know how to say NO to new things coming up, but most of our troubles are from decisions we have already made,” Byron confided.

“Each year, don’t you review your decisions about what you will and will not do, including the cost structure for each of those decisions?” I asked.

“You mean, our budget?”

I nodded. “Yes, your budget. When you look at each budget item, whether it is a direct cost or an indirect cost, you have to ask this question.

“Is this absolutely necessary?

“If the answer is NO, get rid of it, dismantle it, idle it.

“If the answer is YES, move to the next question. What is the absolute minimum necessary to perform this function to our spec?” -Tom