Tightening the Belt

Tough times call for tough decisions, and cutting overhead can be one of the toughest decisions. Operating a business requires certain overhead costs, such as phones, equipment maintenance, advertising, and insurance. If we eliminate, or greatly reduce some of these expenses, we make it increasingly difficult to stay in business.

This can seem like a horrible Catch-22 situation. If we cut these costs, we take significant business risks. If we don’t cut these costs, we risk facing severe cash flow problems. What is a contractor to do?

Now, more than ever, knowing your numbers is crucial. Understanding your cost structure and selling at the right price—that is, a price that is profitable—is the first step. If you aren’t doing these things, almost nothing else matters.

There is no simple answer to this dilemma. Each contractor must assess his particular situation in the context of his business and goals. But it is important to keep long term goals in mind when doing so. For example, saving a few dollars today on advertising may be disastrous in the long term.

The recession isn’t limited to contractor—other businesses are also slowing down. This can be an opportunity to negotiate better rates on advertising, phone service, and other overhead items. As an example, we recently switched our phone service at a savings of more than $150 per month.

If you find yourself needing to trim your overhead, examine your financial statements closely—year to year comparisons can be particularly helpful. They can show where expenses have risen most significantly. Compute the ratio of each expense to revenues—raw numbers are not always helpful when revenues fluctuate. Most of all, develop a plan for dealing with your particular financial situation.