Right level of SG&A overhead
What’s the Right Level of Overhead or SG&A?
Management undertake decision to reduce Overhead cost for various reasons, be it to protect earnings or gain synergies from an acquisition, to reduce the burden rate on sales or to become more efficient but no matter what the reason, though, an important question hangs over every cost control effort: “What’s the right level of overhead?” Many also are not able to distinguish between what is cost cutting vs cost control.
There is no universal answer. But there is a right way to approach the question. Overhead should be incurred for only three purposes—to enable your direct activities, increase their effectiveness, or lay the groundwork for growth. Few years ago when I was at Sodexo’s SMI and had the opportunity to meet Mr. Bellon, he preached us of three nature of OH spending – spending on growth, structural spending and operational spending. It has stuck in my mind not just on how/where should we spend in business but also in personal life.
1.?????Enables Direct Activities – or spending on operational support
When it comes to overhead that enables your direct activities—expenses associated with being a public company, basic payroll functions, financial control, legal and compliance and so on—you should determine how much cost your product or service must bear as a result of those activities (1% of revenue or a fixed cost with some inflation). Then, compare this with the burden that your leanest competitor’s product or service bears. If your burden is greater, you’ve made an implicit decision to reduce its competitiveness. OH spending on running the business is unavoidable but could be lean and strong. Further right automation enables cost control here.
领英推荐
2.?????Increases Effectiveness – or spending on structural need of business
Overhead that increases the effectiveness of operations should be evaluated against a strict cost/benefit standard. There are investment into logistics, head offices, facilities etc. They are needed for future growth, its just the timing of those spending – Rent or Buy or Own. Simply ask whether the measurable improvement in effectiveness pays for itself. You can also rank each overhead item from most effective to least and draw the cutoff at the point you consider acceptable. This same standard should be applied to many activities not traditionally recognized as overhead.
3.?????Lays Groundwork for Growth or Business Development
Invest in sales and growth, do you have an alternative? Finally, one should look at the Net Present Value of overhead that constitutes an investment in growth, just as other investments are. Its worth taking a call when the NPV and ROI are worth investing for. Focus on Sales and Growth is imperative and one’s overhead spending on same should not be sacrificed.
You are in the prefect place and time to experience first hand how inadequate levels and quality of overheads undermine growth and profit... and that's probably why you won't find the answers within. There are solutions out there, but implementing them will be the challenge. Good Luck !
Director of Operations at WASITA GROUP
3 年Super
Business Incubation / Advisor @Sandooq A Watan - Startups Growth
3 年Great share! I think the biggest risk for a company is to look at its overhead costs in a static way and not reevaluate them frequently enough. I guess this is also how you end up doing pro-active cost control rather than reactive cost reduction.
Operations Director / High Volume Catering Specialists and Facilities Management / Human Asset Management
3 年Hi Rakesh, Great insight and to the point. While bootstrapping my startup since the beginning of the year the reasoning behind the right cost overhead and intelligent investment in infrastructure became more apparent to have a successful bottom line.