The head of finance and accounting should be very conscience of minimizing overhead and administrative costs while at the same time providing financial statements and analysis that the business owner can understand. They need sufficient financial support to achieve and maintain high levels of product quality and customer service, while making sure they also have the appropriate amount of cash to run their business. Funding overhead items essential to the operation while reducing or eliminating expenses that contribute little or nothing to the bottom line often means realigning the budget by cutting costs in one area while making more funds available to another.
Definition of Office Overhead
The costs of running a business consist of two major categories: operating expenses and administrative expenses. Operating costs are those expenses directly associated with the business’s products, such as raw materials, manufacturing equipment, packaging and shipping. Administrative expenses are costs that are necessary to run the business, but not directly tied to a specific product or service. Examples include administrative salaries & wages, office rent, telephone & internet, travel & entertainment, office supplies, advertising and similar expenses.
During periods of economic prosperity, overhead expenses tend to increase because there is plenty of money available. When business slows and profits decrease, however, overhead expenses are carefully scrutinized. Items that are not essential to the operation are reduced or eliminated. When reviewing overhead costs, it is important to maintain a proper balance between cutting those items that are clearly unnecessary and continuing to fund activities vital to the success of the business.
Office Overhead Categories
Office or administrative overhead expenses typically fall under three major categories: Core Activities, Support Activities and Diversionary Activities.
Core Activities are functions that directly add to the business’s value. Product design, materials sourcing, purchasing, and sales and distribution are examples of core overhead expenses.
Support Activities do not directly add value to the product or service, but are necessary to sustain the overall operation. Examples include records maintenance, travel & entertainment, human resources and staffing. Although some people consider accounting a non-value added department, or a “sunk” cost, the right accounting staff can directly add net income to the bottom line. A few examples are by ensuring a company has a proper work in process schedule in place so the business doesn’t experience fade when the project is completed or by identifying ways the business can cut costs. Often times a great Controller or CFO will pay for themselves with the value they bring to the business.
Diversionary Activities add little or no value to the business, but are needed to offset the effects of an operational shortcoming or deficiency. An example of a diversionary activity is an advertising or public relations campaign initiated to counter the effects of mediocre or poor product or customer reviews.
Analyzing Overhead Expenses
The goal of overhead budgeting is to minimize costs while maintaining the proper levels of product quality and customer service. This requires a careful allocation of resources to support those functions of the business that are crucial to its success, while reducing or eliminating costs in areas that contribute little or nothing to the operation.
An in-depth review and analysis of office overhead expenses is the starting point for controlling administrative costs and realigning the office overhead budget. A good place to begin is interviewing the company’s employees for their input and suggestions, since they are the people closest to the situation.
Customer feedback is another valuable source of information that can bring operational shortcomings to the surface. Many of these deficiencies can be corrected by increasing funding where it is most needed to reverse the trend, while reducing or eliminating items that are not essential to the business’s success. An overhead budget analysis can sometimes be prepared using in-house personnel, although it may be in the best interests of the business to retain the services of an accounting or finance professional proficient in budgeting through an outsourcing agency such as Pro Back Office.
In addition to budgetary assistance, outsourcing can often be the solution to directly cutting office overhead expenses while maintaining and perhaps even improving the desired level of service. Pro Back Office can arrange professional assistance at any level from bookkeepers and accountants to controllers and CFOs. PBO’s full line of support services includes bookkeeping, accounting, payroll processing and HR & staffing assistance. Outsourced services can be either temporary or ongoing, part-time or full- time, depending upon the client’s needs. In most instances, the cost of outsourced services is considerably less than hiring and supporting a full time employee. Start controlling your office overhead by contacting one of Pro Back Office’s professional consultants at 858-622-1681 to discuss your business’s budgeting needs.