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News DetailsStrategies to help keep overhead expenses in checkDate: 2/19/2010 News DetailsWritten by Marybeth Delgado / Free EnterpriseALTHOUGH core expenses are often obvious in a business, overhead expenses are not necessarily apparent. As a cost-reduction expert, I am often asked how to identify which overhead expenses should be reviewed more closely. Here are several strategies I recommend to help companies identify expenses that may benefit from closer scrutiny: 1. Identify your top expenses. THE 80/20 principle is a great rule of thumb to follow, as overhead expenses, by nature, are numerous and not relatively large. The best place to start ranking expenses is the general ledger (G/L). Use a full year to ensure you capture any seasonality and make the larger expenses more visible. But don’t stop there. It isn’t uncommon to find misclassifications in the G/L for overhead expenses, with office supplies the most common culprit in companies of all sizes. The Accounts Payable (A/P) ledger is another good tool. Export it into a spreadsheet and add a column indicating the primary expense category for each vendor. Then sort by category and amount. This exercise will help expose any A/P discrepancies with your General Ledger and identify expenses that are split among vendors, which is particularly likely if a company has many small locations. You are likely to find cost-savings opportunities simply by consolidating purchases with a single supplier. 2. Sampling is your friend. Looking at any significant expense in detail can be a time-consuming, mind-numbing chore. Few companies have the time or resources to review a year of invoices in depth. I suggest you start by comparing invoices from a supplier, separated by six months or a year, to help highlight price creep with a vendor and within an overall expense. It is common to see prices rise due to reasons beyond the control of your vendors (increases in the cost of fuel, for example). By identifying these increases, you can ensure they are aligned with existing pricing agreements. This exercise also helps highlight new surcharges or costs. It is common for across-the-board increases to create pricing errors because custom agreements are not well identified and reviewed. 3. Let your eyes spot increases. Expenses rise and fall for a myriad of reasons. A good tool, especially for smaller businesses, is to chart monthly expenses for a year for various expense categories. Use whatever source is easiest—the actual invoices, accounting software or even credit-card statements. I highly recommend using a spreadsheet for this analysis because the data can be presented as graphs and charts. These visuals are the key to quickly identifying changes that can be further analyzed as needed. A steep increase may identify an otherwise unnoticed price increase, or it may be related to production of a new product or the unexpected use of resources. The spike in the office-supply cost may be due to higher paper prices, opening a new office or back-to-school shopping in the stockroom by some employees. This tool goes a long way to help businesses identify positive and negative influences on their costs. Any or all of these strategies can be implemented to help businesses quickly survey expenses and highlight potential problem areas. As a company better understands how it spends its money, it can leverage that knowledge to keep costs best in class. Marybeth Delgado is the managing director for the Philippines with Expense Reduction Analysts, a worldwide network of consultants specializing in finding extra profits by reducing expenses in noncore categories. She can be reached at the 28th Floor, The Enterprise Center, Ayala Avenue corner Paseo de Roxas Avenue, Makati City tel. no. (632)849-3499/(632)215-6315 and e-mail mdelgado@expensereduction.comThis e-mail address is being protected from spambots. You need JavaScript enabled to view it. Website: www.expensereduction.com Free Enterprise is a rotating column of members of the Financial Executives Institute of the Philippines, appearing every Wednesday and Friday.
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