Those who have known me for several years may remember me as being quite a bit heftier than I am today. My weight gain did not happen overnight. Five pounds here, three pounds there, and eventually I was carrying 60 pounds more than I needed.
Overhead expenses in a business can creep onto the income statement in the same way that my weight did on me.
Overhead expenses are those fixed costs that happen every month whether you sell anything or not. It includes salaries for bookkeepers, sales staff, supervisors and managers. Money for rent, loan payments, leases, and cell phone bills are also in the category.
Entrepreneurs must pay attention to overhead, as these expenses determine whether or not a company breaks even. You only make a profit if the money you make selling a product or service is more than your overhead costs. For example, if you make a profit of $1 after paying for materials and labour, and your overhead is $10,000 a month, you have to sell 10,000 units to break even. If you can lower overhead to $5,000, it will take sales of only 5,000 units a month to break even.
Over time, overhead grows one decision at a time. When you make the decision to hire an extra bookkeeper, add another cell phone for your staff, or rent space to house your business, it increases your monthly overhead. And with each increase in overhead, you have to sell more units to reach break-even.
I made the decision to lose weight because I had a wake-up call from my doctor. If I did not lose weight, then I would need to begin to take medication to lower my cholesterol and reduce my blood pressure. Most small-business owners got their own wake-up call when the recession hit. They had to cut their overhead or risk going out of business.
Now I watch my weight because I know how hard it will be if I have to lose it all over again. Think of each addition to your monthly overhead expenses in the same way.
Should I eat that extra dessert? Nope — the pain of losing the weight it puts back on me is not worth it. Should you add that extra expense to your business each month that you can really do without? Nope — just remember what it took to cut back expenses to make it through this recession.
Dr. Jeff Cornwall is the inaugural recipient of the Jack C. Massey Chair in Entrepreneurship at Belmont University in Nashville, Tennessee. He also serves as the Director of the centre for Entrepreneurship. He has published six books and numerous articles on entrepreneurship. This post was originally published on his blog, and it is republished here with permission.
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