How to Know if Your Overhead is Too Heavy
Feb 15, 2023What you may not realize as an online business owner, is that you're being weighed down every day by this thing called overhead. So what is overhead? It's all of your indirect costs: the cost to keep the lights on, the cost to operate. They're required for you to stay in business but not necessarily directly related to the thing that you sell.
If you have a physical location, it's probably rent, utilities, equipment, administrative items, office supplies, cleaning, etc.
Why does it matter? Heavy overhead is the number one killer of businesses. If your overhead is too heavy, you may have serious cash flow issues and find yourself unable to pay your bills and operating costs.
So how do you know if your overhead is too heavy? Take a look at the relation of your net margin to your gross margin. It's really easy to increase overhead but if you can't justify that increase with a subsequent increase in income or decrease of other costs, you should hold off.
"You cannot out-exercise a bad diet. You can't pour more water into a bucket with holes in it and expect it to fill faster. It's going to leak out through."
In this episode, you will learn the following:
1. Discover how overhead costs can be draining profits from your business.
2. Learn how to identify if your overhead costs are inflated.
3. Uncover strategies to optimize overhead costs and maximize profits.
What you'll hear in this episode:
- What is overhead and why does it matter?
- Your gross margin is a great measure of profitability at its core level.
- The area in your profit and loss where you have the most control.
Here are some brief snippets from this episode:
[00:00:49]
Overhead is the cost to keep the lights on in your business. These are ordinary and necessary costs to run your business, but they're not necessarily directly related to the goods and services you sell. Here's how to tell immediately if you have an inflated or heavy overhead.
[00:07:41]
Be careful with cutting ad spending, knowing that that can have an impact on the bottom line of your sales, your revenue. Make sure that the things that you're analyzing don't have a direct impact on your sales or direct ROI separately.
Related episodes:
213. Creating a Cost-effective Agency Model with Paul Seaton
217. Designing Systems to Scale with Ernesto Mandowsky
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The information contained in this podcast is intended for educational purposes only and is not individual tax advice. Please consult a qualified professional before implementing anything you learn.
