BENCHMARKING YOUR BUSINESS: Recession Benchmarks

The news about the economy hasn’t improved and I seriously doubt we will see significant economic improvement for some time. If this holds true, it will be necessary to monitor some critical benchmarks that will indicate when you may have to take drastic and unpleasant action if you are to get through the current economic perils.

G&A Overhead Costs. General and administrative (G&A) overhead costs are costs not directly caused by a job you perform or a service you provide. Often, it is referred to as “indirect” costs because these costs cannot be directly attributed to a job or service. Examples of G&A costs are advertising, rent, telephones, communications, utilities and staffing. G&A overhead costs average between 20 to 25 percent of annual revenue. Larger companies, over $10 million in annual revenue, will often have a lower G&A overhead cost in the 16 to 20 percent range. I refer to these costs as the cost for bureaucrats and bureaucracy. Anyone not producing billable hours is a bureaucrat. Any unnecessary cost to produce a job is bureaucracy. Both are essential, but they can get you in a lot of trouble if you don’t know how to measure and monitor them effectively.

Office staffing costs. Workers like bookkeepers, estimators and receptionists comprises the largest portion of G&A overhead. These costs normally average half of all G&A overhead, between 10 to 12 percent of annual revenue. These figures for companies over $10 million in annual revenue range around 8 percent. However, even for larger companies, this is still about half of all G&A overhead costs.
 
Why the Fuss? Let’s say your revenue budget for 2008 is $1 million. G&A overhead costs for most firms would be about $250,000. Office staffing costs would be half of this, or $125,000. As you near mid-year, you notice sales are behind your projections and you’ll be lucky to hit $750,000 by year’s end. What do you do? Multiply the $750,000 by 25 percent. The result is $187,500. Half of this is $93,750. The amount you can reasonably afford to pay for staffing just dropped $31,000 – from $125,000 to $93,750. You must take action.
 
Act Quickly. You need to cut G&A overhead costs quickly. Items like advertising, rent, communications and  utilities are pretty well fixed and difficult to reduce in the short run. Office staffing, the biggest chunk of G&A costs, is the key area to address and reduce. Face the facts and tell your bureaucrats what you’re up against. Be creative and tell them to be creative. Offer bureaucrats the opportunity to push a mower or dig a hole. It’s all about maximizing billable hours and minimizing staffing hours. If your team comes together, meets the challenge and gets sales back up to the $1 million level, then everyone has saved their job. If you can’t get sales to where they originally needed to be, you have to make cuts.
 
The 4/10 Multiplier. Here’s a little something to consider. Add up all of your G&A overhead costs as I have defined them and multiply the total by a factor of 4. This figure will tell you approximately what your sales need to be.
 
Next, add up all of your office staffing salaries and multiply the total by a factor of 10. Sales need to be approximately 10 times your G&A overhead salary cost. Every dollar you pay for salaries for bureaucrats needs to generate $10 in revenue. This is what I call the 4/10 Multiplier.
 
As management guru Tom Peters says, “Measure what’s important! LL

Jim Huston is president of J.R. Huston Enterprises, a Denver-based green industry consulting firm. Reach him at 800/451-5588, benchmarking@gie.net or www.jrhuston.biz.