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Friday
Jun072013

Become Ruthless With Overhead

While watching the TESLA MOTORS Annual Shareholders Meeting a few days ago, i heard Elon Musk, the CEO, say something that struck a chord.  While discussing profit, he mentioned that "even an airplane had to clear treetop level".  

I don't often discuss overhead on this blog.  But overhead is one of the most important single elements in a business.  It reflects what the leader thinks is important to "fly".  It can either help destroy a business or propel it.  It should be thoroughly and often reviewed by the leader of a company.  

When startups ask me for assistance, overhead is one of the first things I look at after I sign the Non-Disclosure Agreement.  It tells me so much about how that organization thinks.  When I finish understanding what and why the company is spending, and there is mutual agreement about future goals and spending, then I proceed with the revenue part of the equation.

The graph below is simple, and it is how I view fixed overhead.  What is necessary to produce sales?  It shows three things: the "fat" is fixed, especially a rent lease, but does not really support or create sales.  Technology is very important now for a direct selling company, and spending wisely is even more important.  And last, personnel as a fixed cost can be an anchor or the wind beneath the wings.  The key is to have all the team working as the wind.  

When I am finished eliminating what doesn't support or produce sales,  I pay special attention to technology costs.  Finally, I focus on the organization, and how people are supporting the goals of the organization.  

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