Overhead is a luxury

By Ken Matesz

The word “overhead,” in business, is an accounting term that refers to all ongoing business expenses not including or related to direct labor, direct materials or third-party expenses that are billed directly to customers.

In my masonry heater business, the firebox door to be installed on the customer’s project is a direct material expense of the project, not overhead.  But the phone bill I receive for having the ability to call customers is an overhead cost.  My truck and its maintenance is overhead.  Replacement diamond blades are overhead costs as are things like the maintenance of a brick saw.  

Another way to look at this is that only the actual materials used for building the masonry heater along with the actual labor to do the construction are direct expenses of the project.  Virtually every other expense I may have to run my business is overhead.  If an item, tool, fuel, material, service or anything else is not mandatory for the completion of the project, it is overhead.

I did a large masonry heater and wood-fired oven project not far from an Amish community.  The homeowner was hiring Amish carpenters to build porches and to do several other projects throughout the massive, 5,000 square foot house.

Every day, a van driver brought the whole Amish crew, usually 10 guys, to the job site along with a trailer full of their tools.  They worked all day and the van driver took them all home in the late afternoon.

This is very smart business.

Why?

Overhead Drowns

Well, any common carpenter would drive his own truck and trailer to the job every day.  His helper may even come in a separate vehicle.  The common American carpenter likes the luxury of having his own truck.  He’ll drive it to the site.  Then he’ll hop into the truck at lunchtime and drive into town to get a lunch.  Then he will drive back to the work site.  Then he will drive back into town for materials he forgot.  Then he will drive back to the job site.

He’s paying for all that gasoline, all the wear-and-tear, all the insurance, and all the maintenance on that shiny truck.  He may even have a monthly truck payment on its purchase. He’s drowning his business in the luxury of a truck.

The Amish crew eliminated loads of luxury.  Ten guys came in one vehicle driven by some old guy from near where they live.  The old driver probably charges them some piddly amount for the service.  His pay as driver probably doesn’t really even cover all his gasoline, wear-and-tear, licensing, insurance, and maintenance costs.  He might not even be charging them anything; he just does it as something to do in his older age.  Or maybe the Amish men pay him with work or food from their farms.  No matter how you slice it, they have eliminated tons of overhead cost.

Even if the Amish men are paying the driver very well, they are still getting ten guys to work in one vehicle.  Eliminating overhead is smart business.

All Overhead is Luxury

Every time I go use my brick saw, I am so grateful that I bought it 20 years ago.  But if I had to, I could build a masonry heater without a brick saw.

Have you ever considered that, all over the world, craftsmen used to build very elaborate, beautiful structures of wood and masonry without any electrical power tools at all?

Every dollar that you spend on overhead comes directly out of your profit.  If you are just starting a business or if you are running a business that is barely surviving, take a look at your overhead costs.  Maybe you have both a cell phone and a land line.  Do you really need both to run your business?  No, you don’t.  I ran my business without a cell phone for twenty years.  I’m sure you could run your business for twenty years without a land line.

Do you need a brand new truck, or can you use a well-maintained old truck?

Do you need the latest cordless tools from DeWalt?  No, you don’t.  In fact, did you notice that when you use cordless tools, you have to pay for new batteries every so often.  With corded tools, usually the homeowner pays for the electricity.  I bought a high-quality corded drill about 15 years ago.  It never needs batteries and I never pay for the electricity it uses on the job.  It still works just like new.

Do you need to eat lunch at a restaurant?  Or can you survive on a packed lunch? Or can you skip lunch altogether?

These may sound like small items, but they add up fast.  If you eat at McDonald’s every day for lunch at $5.00 a day, that can add up to $600 per year (120 work days x $5.00 = $600.00).

If you skip lunch every day for one year you’ll have a third of  the money you need for brand new brick saw.  If you get rid of the land-line phone, you’ll save another $50.00 per month.  Now you have another $600.  Your brand new brick saw is almost a reality – for cash – in one year.

And you didn’t have work one second more to do it.

Or, you could just sell the brand new truck, saving all the truck payments, and get the new brick saw next week.  Buy a used truck and pay in cash, then go pick up your new saw with it!

Take a careful look at your overhead – all the things you pay for and maintain that aren’t absolutely crucial to doing your craft.  I bet you can add some profit to your bottom line by cutting away some luxury.

Overhead is a luxury that profit cannot afford.

Let’s build a smart, successful business.

Ken