How to do an overhead analysis for a small business

ANSWER: Sounds like you need to cut overhead. On the other hand, you have the right to avoid indiscriminate cost cutting. Cutting in the wrong places can cause irreparable harm to your company. Over the years, we’ve seen many small businesses safely reduce their overhead costs.

We recommend a process called Overhead Value Analysis. The purpose of this work is to identify savings in the company’s overhead costs. It is possible to do this work yourself, but we have found that there is significant value in having it done by an unbiased third party. The steps are as follows:

1. Get an overview of the operation – A third party will start by meeting with the owner and perhaps some of his/her key assistants to get a clear picture of how the organization works and the key responsibilities of each department. This always involves obtaining an organization chart (which may need to be created). The purpose of this step in the process is to gain a very clear understanding of how senior people think the organization works (be aware, senior people’s understanding, even in a small company, does not always correspond to reality).

2. Identify the tasks and the time people spend on each – The third party should then meet with each employee individually, or at least a reasonable sample of employees, to ask how they spend their time. Have them list exactly what tasks they do. Then ask how long each task takes to complete. When grades don’t pass the test, push harder, asking probing questions and demanding to see work products. You want the estimates to be as accurate as possible. Watch out for people who inflate the time it takes to do their job. Surprisingly, after the calculation, it often turns out that the amount of time people spend on their tasks is significantly less than the number of hours they are paid for.

3. Determine the number of hours it takes to complete each task – You’ve already determined the amount of time people said they spent on each task. Now you need to determine how long they should take. Do this by cross-checking ratings from other employees who perform the same task. You may need to get two people together to resolve any significant differences. Meet with executives and senior managers to get their feedback. Ultimately, settle on a rough estimate of how long each task should take to complete.

4. Identify opportunities – You will find opportunities to reduce overhead costs in three areas:

• Tasks that should not be performed – You may identify tasks that are redundant or for some other reason should not be performed. Obviously, eliminate such tasks and save the time required to complete them.
• Underutilized people – now you have the best estimate you can get of how long each task should take. Do the math and determine the number of hours required to complete each department’s tasks versus the number of hours available and identify areas of underutilization.
• Work that can be done by a cheaper resource – You will likely find that highly compensated people spend significant amounts of time doing things that can be delegated to cheaper resources.

5. Finalize the action steps and calculate the benefit – Now the hard reality – you have identified many possible savings opportunities. However, capturing real savings requires reducing:

• The number of employees
• The average compensation of an employee
• Money paid to third parties

Sometimes companies can achieve savings by not filling vacancies or by delaying hiring until the business grows. More often than not, the owner is faced with difficult, agonizing decisions. But if the company wants to save money and become profitable, tough choices often have to be made.

Overhead analysis is a powerful tool for reducing waste and increasing profitability. Capturing the benefit most often requires difficult decisions, but in some cases it is the best alternative.