Why Overhead isn’t necessarily bad.
I never thought I’d be able to grow up and say, “Mom, I’m not just a productive businessperson, I’m overhead!” Many people think overhead is a bad thing. Well, maybe. Maybe not. Overhead’s an essential part of business.
Overhead is the time, effort, money and manpower you spend on parts of the business that don’t directly make money. The cleaning service that keeps your desk so shiny you can see yourself? Overhead. Your office rent? Overhead. That cool new Blackberry? Overhead. The wonderful people who work in your accounts receivable department? Also overhead. And brace yourself: if you’re a manager, you just might be overhead, too.
We talk as if overhead’s a bad thing. That’s just silly. Building and maintaining the support systems to do our job, that’s overhead, but it’s also necessary. In today’s office environment, I’ve had executive clients who hunt-and-peck type their own letters and fill out their own expense reports. They don’t want the overhead of an assistant, they say. Harumph, I say. If they’re high-powered folks (and they people I work with are!), they can do more for the business by concentrating on their jobs, not their expense report. If they could spend 100% of their brainpower on their job, they would build so much great business that the so-called overhead of an assistant is peanuts.
One place the world is very confused about overhead is with non-profits. Many people think the better a non-profit is, the less overhead it will have. “Only 2% of every dollar goes to overhead!” non-profits proudly claim.
What they’re not claiming, probably because most non-profits don’t know how to educate donors, is that with only 2% money available for overhead, they’re not likely to ever build the talented staff, tight business systems, and focused delivery to make a big impact in the world. We routinely accept that businesses may need 30-40% overhead just to get the job done well. The same is true of non-profits.
The way to think about overhead is to ask whether the organization gets better results with the overhead than without. For for-profit companies, it becomes the most fundamental management question: does a dollar spent on overhead turn into more than a dollar of profit. If the answer is Yes, then it’s useful overhead. (Note that I’m not saying a word about CEO salaries here.)
For a non-profit, the bottom line isn’t money, it’s impact. You need to ask: can the non-profit have greater impact with its overhead than without. Consider a Non-Profit Co, a third-world hospital. They could have low overhead by taking donations, buying and distributing medicine. But if they increased overhead by spending money educating hospital staff in public health, they could educate communities to prevent many diseases in the first place. The training costs increase overhead, but increase the positive impact of the hospital even more than if the money were spent directly on medical care.
Personally, I incorporated last month. My last two weeks have been spent filing incorporation stuff, navigating government websites, arranging payroll deposits, transitioning merchant accounts, and doing lots and lots of stuff that is all overhead. I decided to write this article to convince myself that the overhead was time well-spent. And it was, because overhead is only a bad thing if it doesn’t help the business move forward. And in this case, the overhead inspired an article and a podcast. And that, my friends, moves my business forward.
So donâ€™t reject your overhead. Embrace it! Because like it or not, itâ€™s here to stay.