Benchmarking
July/August 2002
Non-salary
overhead costs
By Ian
Brown
o w does this piece relate to controlling non-salary overheads? Any group
of stores which pro-actively makes structural change on this scale (as
opposed to the actions of an administrator) must be taking account of
their financial performance. They are responding swiftly to the changed
market circumstances that confront them. They have to be in strong command
of their business operations to be able to take these corrective steps.
Importantly, how would you respond?
Retail rationalisation
is not such a bad thing
by Mark Tosh, Drug Store News, New York May 20, 2002
The old joke in retail is that there are never too many stores, just
too few customers. With the economy down and unemployment up, however,
that joke just doesn't get quite the same hearty response these days.
Several retailers over the past few quarters have come to the conclusion
that, yes, there are too many stores-at least in certain markets-and
they have begun taking steps toward rationalising their store bases.
Indeed, the rationalisation of retail square footage can be seen as
a positive development for a sector that's much in need of a lift right
now.
The latest examples of this rationalisation come from the supermarket
channel. Winn-Dixie reported May 6 that it has decided to break up and
sell its 71 stores in Texas and another five in Oklahoma, news that
came less than one week after Albertson's reported its plan to sell
12 Seessel's stores in the Memphis, Tenn. area to Schnuck Markets.
The most significant retail rationalisation under way right now is happening
at Kmart. The discount chain is closing 283 stores across the United
States, a move that definitely will take retail space out of the marketplace.
Whether this rigorous reduction is enough for Kmart remains to be seen,
but competing retailers in nearby locations have to be feeling a bit
better following this rationalisation."
In this article we will look at controlling Non-Salary
overheads as the next logical step in managing and developing your business.
Effective cost control lets you see the benefit of the improved gross
profit margins that we discussed last issue.
What are Non Salary
Overheads?
What are 'non-salary overheads' you ask? In our terminology,
it is the total overhead of a business: all costs other than stock bought
for resale, and staff wages, such as:
· Advertising, promotion
and franchise fees
· Accounting and
legal fees
· Insurance
· Interest and bank
charges
· Postage and stationery
· Rent
· Depreciation,
lease and HP
· Repairs &
maintenance, telephone and fax
· Staff on-costs
such as superannuation, workers' comp insurance etc
· Vehicle operating
costs
· Other occupancy
costs (rates & taxes, power, gas, heating, cleaning etc)
Now have a look at some of the average results from our
research into Australian Corner stores, Supermarkets and Service Stations.
See how your business compares.
Quick Benchmark:
Non-salary overhead: Corner stores
As %s of revenue:
Rent 3.71%
Interest, Bank charges 1.94%
Other occupancy costs 1.70%
Non-salary overhead per
person $17,055
Non-salary overhead per
sq metre of in-store area $378
When we analyse a business,
we assess them on:
percentages of total income;
how they compare with the other costs for the business;
how they relate to similar sized businesses and also those from similar
location-types.
In addition, we look at the relationship of non-salary
overheads per person and per $ of wages. This is all done in an attempt
to review performance from a number of different yet important perspectives.
Quick Benchmark:
Non-salary overhead: Service Stations
As %s of revenue:
Rent 1.69%
Interest, Bank charges 0.93%
Other occupancy costs 0.59%
Non-salary overhead per
person $19915
So what should you look
for?
Of the costs noted above the most significant include Rent
of Premises, Interest & Bank charges and other occupancy costs.
Quick Benchmark:
Non-salary overhead: Supermarkets
As %s of revenue:
Rent 2.91%
Depreciation, lease 1.42%
Other occupancy costs 1.33%
Non-salary overheads per
person $52419
Non-salary overheads per
sq metre of floor area $847
What have we learnt?
For Corner Stores, the most profitable firms had much lower
non-salary overheads. The best businesses spent an average of 7.55%
of revenue on non-salary overheads - well below the overall average
of 10.6%. Many of the overheads became lower percentages of income as
profit levels rose, so this is an important way for you to maximise
your share of every sales dollar.
When we looked at Service Stations, we found that the
most profitable firms also had lower non-salary overheads: they were
highest in the low profit firms (6.65% of turnover for the low profit
group) and lowest in the high profit group (at an average of 5.57%).
On the surface, this difference of 1% does not seem too important, but
it represents a substantial improvement - both in light of the large
turnovers, and also in light of the relatively low gross profit margins
reported in service stations.
With Supermarkets, non-salary overhead costs fell in percentage
terms as firms became larger. For example, the smallest businesses spent
14.01% of business income on non-salary overhead costs, but the largest
firms spent an average of just 7% of revenue on these same costs. Better
cost control was necessary to compensate for the lower average gross
profit margins reported by the larger firms.
Action checklist
These tried and proven tips will save you money!
Budget costs annually
Review costs against budget regularly
Before ordering or buying something, ask: Is this expenditure necessary?
What would happen if you didn't incur a particular expense?
Look for better or less-costly ways of operating the business.
GREAT TRUTHS ABOUT GROWING OLD
- Anon
1) Growing old is mandatory; growing up is optional.
2) Wisdom comes with age, but sometimes age comes alone.
3) When you fall down, you wonder what else you can do while you're
down there.
4) It's frustrating when you know all the answers, but nobody bothers
to ask you the questions.
Feedback corner
Thank you to those readers that were in touch following our last issue.
Let us know what you would like addressed in future issues and we will
be pleased to pull together some suitable material. Your questions will
be shared by others so get in touch with us.
Call 1300555334 and speak to Catherine or Ross.
Ian Brown is Director FMRC Benchmarking.