When times get tough, the tough start cutting “overhead” expenses. But what are the smart leaders doing?

Despite being an accepted best practice, targeting overhead to meet financial targets emphasizes the all-too-common practice of categorizing overhead as an expense rather than breaking down the components and appreciating the investment that each represents. Said most simply, any money you spend in your business should be increasing the value you bring your customers or clients. If you have “overhead” that can be cut without negatively impacting your business (sooner or later), you should have cut those expenses long before an external circumstance forced your hand.

But I digress… Let’s break this concept down in a bit more detail and start shifting the overhead mentality to ensure that your resources are always being invested wisely.

What is overhead?

Overhead traditionally refers to the expenses incurred by a business that are not directly tied to the production or delivery of goods or services. Examples include rent, utilities, salaries of non-production staff, and office supplies. 

For those who know me well, it will come as no surprise that I find the categorization of “non-production staff” as “overhead” a particularly frustrating aspect of traditional thinking in this area.

What is the difference between cost and investment?

According to ChatGPT, “expenses are necessary costs to maintain operations, while investments are made with the expectation of generating a return.” I can agree with that so let’s run with this definition for now.

Why is overhead viewed as a cost?

Honestly, I have no idea. Again according to ChatGPT, it is because overhead “does not directly generate revenue” but I suspect that it is because viewing overhead through a more detailed lens requires time, energy, and a shift in mindset that may be particularly uncomfortable for business owners who began their journeys as solopreneurs.

So what is the case for overhead as an investment?

Rethinking overhead as an investment means recognizing that overhead expenses can contribute to the long-term success and growth of a business. For example:

1. Investing in employee training and development can increase productivity and reduce turnover, ultimately leading to higher profits.
2. Investing in leadership and managers can lead to higher quality results from more junior team members, a net savings in payroll costs.
3. Investing in technology and infrastructure can improve efficiency and streamline processes, ultimately leading to cost savings and increased revenue.
4. Investing in marketing and branding can increase brand awareness and customer loyalty, ultimately leading to increased sales and profits.

In addition, a focus on minimizing overhead costs can lead to short-term thinking and missed opportunities for growth and innovation.

I only believe information in articles with pictures

Seems reasonable. Imagine you have a team of senior employees who deliver great work! You pay each of them $160,000 for their efforts (this may feel low or high depending on your industry but I picked it as a nice round number). Now imagine instead that you paid one of those senior people the same salary to do nothing but train and support a team of 4 junior employees paid half as much. I am willing to bet you could get very similar output from these 5 people as from the 4 senior staff but 5 people with one expensive person who is nothing but overhead sounds expensive…

Here’s the visualization of all those words:

Don’t get distracted by how much you pay one person – look at the bigger picture

Ok, you convinced me!  Now what?

Investing in overhead requires a shift in mindset and a willingness to allocate resources towards long-term growth rather than short-term cost savings. By prioritizing investments in employee training and development, technology and infrastructure, and marketing and branding, businesses can position themselves for success in the competitive marketplace.