How to Analyze and Reduce Your Fixed Overhead Costs
Reducing your fixed overhead expenses as a percentage of sales is another way to improve profitability and increase the value of your business.
What’s Typical in Today’s Industry?
Most distributors have fixed general and administrative expenses between 15% - 20% of sales. Obviously, there is a big impact on profitability if you can reduce your fixed overhead from the high end of this range to the low end.
Non-commission payroll for your admin staff is likely your largest line item under general expenses on your P&L, so we’ll focus on that.
Fixed overhead including back-office administrative staff can creep up during good times and cut into profitability. Sales growth means hiring more support staff, opening new sales offices, investing in new technology, etc., but is your ratio of expenses to sales being maintained or even being reduced so you can drive more to the bottom line?
Key Performance Metrics to Analyze
When it comes to admin staff, volume of orders is your key to see if you are running lean or fat. The average life cycle of an order through your company is similar regardless of the dollar value which is why higher gross profit margins are so important for distributors that have a lot of small orders to process. Margin compensates for the fact that they need to pay for more admin staff to handle the high order volume with small dollars.
When trying to determine admin staff workloads and efficiency, we often review the average # of orders handled per admin staff. We know, for example, that Facilisgroup distributor members have CSRs processing an average of 3000 orders per person and finance staff average even more. The rock star CSRs are averaging 5,000 orders per person! How does your team compare?
How to Improve Efficiency and Keep Costs Down
It all starts with a well written order from your sales team. Orders with missing or incomplete information require more touches by your admin team which takes more time. Minimizing touches is the key to productivity.
Paying reps to write poor orders and then paying admin staff to deal with the resulting challenges is costly to your business. You are paying high commissions to your sales reps, so it’s not unreasonable to ask them to submit well written orders that include all the information needed to get it produced.
Provide reps with a detailed checklist they should review before submitting an order and empower your CSRs to reject poorly written orders and ask the reps to correct them. Accountability leads to change and over time, so this should result in more productivity from your back-office staff.
Consistency also leads to improved productivity and reductions in errors. Develop an order form template and train your reps to fill it in in a consistent manner. Using the same terminology and putting order information in the same place on the form makes it much easier for your CSR and finance staff to process the orders.
Demand that your sales reps check stock and confirm ALL costs before submitting an order. Even insist they note on the order that this has been done – accountability! Nothing taxes a CSRs time like sending purchase orders to vendors for products that aren’t in-stock. And if vendor invoices are arriving that don’t match your purchase orders, this is costing your finance team time and your business money. CSRs should confirm PO costs with the vendor after placing the PO so that most vendor invoices arrive accurate.
The Role of Technology
Technology can have a significant impact on productivity.
Is your order entry system simple and accessible for sales reps so that they can do order entry right into your ERP system? If reps are filling in an order form and then you are paying your CSRs to enter the order into your ERP system again, this is just inefficient and can lead to errors.
Is your ERP system transparent enough to allow sales reps to see order status information without having to ask admin staff? If your office is noisy, it likely means there is lots of verbal communication going on which impacts productivity and your ability to scale sales growth and maintain or grow profits. Make sure your ERP system offers security levels and transparency to critical information, so your admin staff can spend more time processing orders and less time providing information.
Imagine if you could improve efficiency and increase the number of orders handled by your admin team by 500 -1000 orders per year? Now you can grow and put all that gross profit, after commissions, right onto your bottom line profit!