Who Says You Can’t Trim ‘Fixed’ Overhead Costs?
“Fixed” overhead costs are often really anything but fixed and, in this economic downturn, astute business owners can find many ways to trim their overhead — if they trim wisely and don’t put their business at risk.
In no particular order, I have compiled a laundry list of areas where you can reduce your fixed overhead costs. Many of the cuts are relatively easy to do and relatively painless. But some may cut deeply and not all these measures will be applicable to your particular business.
Be sure to consult with your attorney or accountant before adopting any of these suggestions and check all appropriate state and local regulations before proceeding.
Health Insurance — Several Avenues Are Available
You may be able to achieve substantial savings by reducing some of your insurance costs. Your agent, who should be part of your team and acting on your behalf, can help you find ways to safely cut premiums with your existing insurance companies — or shop for new companies — without putting your or your business at risk.
For example, to reduce employer contributions, consider decreasing the co-insurance percentages and increasing deductibles and co-pays. Also look at increasing employee contributions or discontinuing the family coverage payment for your employees. While these adjustments will save you money, they will increase your employees’ costs.
To reduce overall health care costs, shop health insurance providers to find the best package of services and costs. Explore implementing a health savings account or joining an association to get better group insurance rates.
Life Insurance — Use Dividends to Reduce Premiums
If possible, use dividends to reduce premiums or borrow from you policy to pay for the premium. You can pay the loan interest only or borrow the interest, too. Finally, you can cash in a whole life policy for its surrender value if you no longer need the policy.
Disability Insurance — Extending the Waiting Period May Cut Costs
First, you can use your disability insurance dividends to reduce premiums.
Another way to cut costs is to extend the initial waiting period on existing policies from 30 days to 60, 90 or even 180 days. But let me caution you on two points before you consider this cost-cutting measure.
If you extend the waiting period, be absolutely sure that you have enough personal savings to cover any injury that could occur before the policy takes effect.
Also, consider that once you’ve extended your waiting period, you might not be able to qualify to have that waiting period shortened sometime in the future when business is on a more even keel.
So before you go this route, be careful if your health is uncertain.
Company Vehicle Insurance — Shop Around for Better Coverage
There are several ways to save money on insurance for your company vehicles. You can save money by increasing your deductibles, as well as by dropping collision insurance on vehicles that are more than six years old or worth less than $4,000.
You also can save money on premiums by not allowing employees with bad driving records to drive your vehicles.
Finally, shop around for better coverage and pricing. If you haven’t explored it yet, oftentimes, the company that provides your business insurance can provide tie-in coverage for your vehicles at less cost than going to a separate company.
You might also find it advantageous to join an association or group that offers pricing power or enhance coverage.
Workers Compensation — Studious Trimming May Be Found
The best way to reduce workers compensation premiums is to allocate the hours that your workers put on their time cards into the insurance company's rate categories. Most states will allow you to do this, but to be certain, check with your agent or attorney before attempting this.
For example, the rate category for a roofer will be higher than for a supervisor, so allocating by category should lower your overall rate.
However, if you can justify the reallocation and breakdown, expect to be audited on actual payroll costs — because you will be audited. Be sure to get the classification codes from your insurance agent if you pursue this.
Finally, don't forget to obtain certificates of insurance from all your subcontractors that verify their workers compensation and liability coverage. This is critical, because many insurance companies now are auditing for their increased exposure when your coverage as the general contractor exceeds the coverage for the subcontractor.
For instance, if you have $2 million in coverage and your sub only has $100,000, you could be audited and made to pay the difference in coverage costs.
To avoid this, have your subs boost their coverage, or reduce yours. As for those contractors who claim they have no employees but seem to have “workers” on the job site — a sub of a sub — make them retain minimum coverage workers compensation policies.
These policies are an inexpensive firewall in case one of those subcontractors is later deemed to be an employee, or the contracting company hires employees at a later date.
Phone/Communication Expenses — Are All Lines Necessary?
There are several ways to reduce communication expenses. It may be worthwhile to sign up for a cellular plan that has a higher base fee but provides tons of off-peak minutes and decent peak-hours minutes.
You also can form a group of fellow plan users so you can pool and share minutes.
Another way to trim costs would be to drop your answering service and replace it with an answering machine, or use the voicemail service that your phone service provides.
If things get really tight, have your employees pay for their personal use of company phones. Also, consider dropping the land line altogether, dropping dedicated fax and Internet lines and subscribing to a communication package that combines voice and Internet or DSL.
Utilities — Practice What You Preach
We know how to help our customers cut utility costs by insulating their water heater, installing weather stripping, adding sweeps to the doors, improving overall insulation and even turning off that extra refrigerator, so we should do the same for our offices.
Likewise, you can install lower wattage light bulbs or energy-efficient fluorescent lighting. You should also consider using timers, motion detectors or indicator lights in rooms that aren’t always occupied but where lights are often left on.
Finally, to ride out what’s left of the winter, you may want to install a set-back thermostat for the office and warehouse and wear sweaters and heavier clothing
Loan Interest — The Big ‘If’
If your bank or lender will work with you — and that’s a big if — consolidate your loans at new, lower rates. Also, try to refinance any large loans.
Secure a line of credit. It’s best to do this when your bank is open to lending and when you don’t really have an immediate need for the line of credit.
Finally, consider moving short-term debt to long-term debt in order to free up any current cash needs.
Advertising — Cut Back, But Not Drastically
When cutting advertising, don’t cut too severely because now is the time to keep your name in front of as many potential prospects as you can.
Cut back on Yellow Pages advertising and focus on using the Internet and electronic communication to get your message to potential prospects. Whether print or electronic, get advertising help by asking manufacturers or major distributors for cooperative advertising dollars.
Don’t forget to perform simple upkeep on signs and their frames on your trucks and in your office. Keeping your signs up to snuff will project success and trust during the downturn.
Promotions — Worth Trimming
Unlike advertising, it is probably wise to cut back on your promotions and promotional material and to target your marketing.
This might mean postponing your purchase of company shirts, coffee mugs, pens, calendars and holiday cards. You can also drop your sports sponsorship or ask parents and players to share the costs. Also, stop thinking that you have to buy coffee and donuts every time you come to a job.
Instead, only buy promotional items that convey a clear-cut business value. Use direct mail, newsletters to past customers and neighbor letters to target your marketing.
Instead of a holiday card, send a holiday newsletter this year. It will get your name out in front of prospects while telling them so much more about your business.
Finally, plan events and reward employees smartly and creatively to save money — without losing the good feelings that these events usually generate.
Bank Charges — Cultivate a Relationship With Your Banker
Shop around for the best combination of open hours, minimum balances, credit card rates, per-check charges, knowledge of the building business, products for consumer loans and home equity lending. Then, cultivate a relationship with your banker — before you need his services.
Consider consolidating your personal banking with your business accounts to lower overall fees. Negotiate a better loan rate or ask for a loan to manage the downturn.
If it’s too late to cultivate a relationship with your banker, figure out how to work with him — without frustrating him.
Finally, protect your reputation by applying for overdraft protection, phone transfers and other time- and reputation-saving services.
Computer and Office Supplies — Don’t Skimp When Dealing With the Public
There are several easy ways to trim office supply costs — buy from wholesale clubs, buy in bulk, delay buying promotional items until better financial times, etc.
However, don't skimp on stationery or contract documents. Customers want to deal with professionals, even during a downturn — and less-than-than professional stationery and documents will reflect badly on you.
You can use your computer creatively to save costs while reinforcing your professionalism. For example, create branded templates for custom contracts, bills and other documents used by the public. Buy a good color printer for this and for printing newsletters, photos from digital cameras, change order documentation, brochures and other branded materials.
One other computer trick you can implement to save money and precious staff time — find ways to automate backup files, software updates and other computer maintenance.
Maintaining Your Vehicles — Ways to Save at the Pump
Fill your tanks with the lowest allowable grade of gas. Also, maintain the proper tire pressure on all your vehicles. This will improve vehicle mileage and reduce tire wear and tear.
Don’t get caught up with credit card promotions and drive all those extra miles just to buy gas at a specific card’s station.
Finally, instead of buying new tires for your trucks, buy retreads if they’re available.
Subscriptions and Memberships — Focus on Trade Associations
First of all, eliminate as many of your duplicate paid subscriptions as you can and, instead, share and circulate the magazines and newsletters with your staff as much as possible.
Also, cancel the subscriptions you don’t read regularly.
Likewise, drop out of the non-trade organizations where you are no longer active.
Stay active in your trade associations — like NAHB and your local home builders association and remodelers council — but cut down on some expenses by trying to share staff, tools and non-competitive business information with fellow members. Also, participate in association networking so you can cultivate new business opportunities and further your professional development.
Trade Shows and Conventions — Don’t Skimp Here
I firmly believe that, in order to succeed today, you must be the most informed, best-equipped salesperson you can be to deal with prospective clients. You need to learn all you can about the latest installations and their limitations, the newest techniques and more.
So, my advice is to attend as many trade shows and conventions as you can, take in as many educational opportunities as possible and network with as many people as you can.
Keep in mind that the best learning can come from peers sharing battle-worn and tested techniques. Attending these tradeshows is a perfect time to talk with others in the industry and actually learn from their mistakes and triumphs.
Having extensive product knowledge — and access to manufacturers and distributors — is a great advantage over your competition, and trade shows are a perfect place to see and try new products.
Attend local seminars, too, because they are oriented toward your local market and they’re less expensive.
To cut down on you show expenses, eat, sleep and travel as cheaply as possible. Share a room, don’t eat at expensive restaurants, use shuttles or share rides and economize wherever possible.
Charitable Contributions — Narrow Your Giving to Only Your Favorites
From now on, only give contributions to your favorite charities or organizations. Even with that caveat in mind, stay clear of charities that use professional solicitors who can take a large portion of the donations for their fees.
Also, if possible, donate time and labor rather than money — even to your favorite charities.
And if you operate as a corporation, contribute using your business funds, rather than your personal funds. That way, you’ll be making your contributions with pre-tax dollars.
Tool and Gas Allowances — Keep Them Strictly Business
One of the best ways to save on tool and gas allowances is to step up the accountability so the allowances are for business purposes only.
Step up the accountability for gas reimbursements so you can maintain IRS deductibility.
Also, make sure you have valid reasons for tool repairs and new purchases. If possible, have your employees own more of their tools. That way, they’ll take better care of them and reduce your maintenance costs.
Rent — This May Be a Good Time to Renegotiate Your Lease
With all the over-building and high vacancy rates in the commercial sector, now may be a good time to renegotiate your lease, terms and building improvements.
You probably will never be in a better position to reset your terms, but be prepared to move if your offer is not honored.
Collections — Choose Customers Wisely, But Also Budget for Deadbeats
Attempt to collect all your bills in a timely manner. Do this by choosing your customers wisely and by establishing a payment schedule that has no more than 10% due at last payment.
If you still accept changes verbally, use only written change orders from now on. You’ll be able to account for them more accurately.
Write concise contracts — and include language that allows for collecting of attorney's fees when necessary. Also, don't be afraid to stop work when payment schedules are not being followed — and be sure to enter language to this effect in your contracts.
Finally, don’t expect to be able to collect all payments in this difficult economy. Budget for deadbeats and an increase in bad debts.
Sales and Administration — Reduce Salaries (Even Yours), But Step-Up Incentives
The largest, single overhead item you have is probably your salary. Cut it, but establish incentives that will enable you to regain some of it by achieving legitimate sales, volume and gross profitability goals.
You also can earn some of you salary back by legitimately reallocating some of your time to specific jobs. To reduce the amount of owner’s salary as overhead, we charge owner's direct job time and supervision as “direct labor.”
When renegotiating salaries with your key workers — including your production, sales and office staff — establish similar goals and incentives that will enable them to earn additional money while making your company more efficient and productive.
For example, let them earn more by improving margins; through gross, net or volume sold; by how many hours under the estimated hours were needed to complete the job; better organized filings; better pre-qualified leads, etc.
Also, to cut down on accountant expenses, learn to file the easy tax reports yourself and use your accountant for only the difficult budget and tax areas.
Fire Sale — When All Else Fails
When all else fails, sell your underused tools, vehicles, computers and machines.
Not only will you get a little cash, you’ll save money in the long-term by taking those items off your insurance policies, eliminating some maintenance costs and downsizing your storage needs.
Alan Hanbury, CGR, CAPS, CGP, of House of Hanbury Builders based in Newington, Conn., provides remodeling and handyman services. A longtime leader and past chairman of the NAHB Remodelers, Hanbury is a sought-after lecturer and writer on the remodeling industry and its professionalism. For more information, e-mail Hanbury, call him at 860-666-1537 or visit www.houseofhanbury.com.