The cost cutting on jobs that we discussed last month goes only so far. In difficult times like these, you need to be flexible. That means being able to expand or contract overhead while maintaining sufficient net profit to keep both the company and its owner afloat. You will have a much better sense of control if you lay out potential overhead reductions right now before you’re trapped in a corner by tight cash flow.
There are only two ways to make a significant dent in overhead costs, and both are difficult to apply and require some lead time. The first is to reduce occupancy costs by moving the office back into the home. This may be impossible or expensive depending on the terms of your lease. On the other hand, if you own the building, you could stay put but offset some of the cost by renting a portion of the space to architects, designers, trade contractors, or other colleagues.
The second way to reduce overhead is to reduce support staff. For most remodelers, the biggest overhead expense is the payroll of all the people who work in the office. During good times, remodelers tend to hire more support staff and delegate greater amounts of responsibility. To cut these expenses, you’ll have to know who does what, how well, and at what cost.
Build a spreadsheet to help you think rationally about this difficult decision. List all the people who currently work in the office. (Don’t include production management — these wages should be above the line in Cost of Goods.) Under each name, note primary responsibilities, and annual salary, including burden. (Apply about a 35% burden if you offer good benefits.) Next, assign each task a value on a scale of 1 to 3, where 3 is most important. Lastly, assign each person a letter grade to signify how well you think they’re doing in that job.
Determine how much money you have to cut out from overhead and, using the information derived from the spreadsheet, determine where to apply the knife. Lay off the mediocre performers and assign theirs tasks to others or take them on yourself. Perhaps some employees can work part time for a period until work picks up.
Making these kinds of personnel decisions is hard work, and it’s always a difficult conversation when you have to lay someone off. But to protect your bottom line and your hard-won reputation, you might have to do it. Be honest and compassionate and clear-headed throughout to maintain your own self-respect as well as that of the remaining employees. Good luck. —Judith Miller is a Seattle-based remodeling business consultant and trainer specializing in accounting, finance, and computerization. Visit her at our blog or stop in at hers.
A version of this article appeared in print on page 72 of the January 2009 issue.