From the course: Corporate Finance: Profitability in a Financial Downturn

Reducing physical overhead

From the course: Corporate Finance: Profitability in a Financial Downturn

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Reducing physical overhead

- There's a great line from a Rolling Stone song that goes something like, "you can't always get "what you want, but sometimes you get what you need." You may want a fancy office, but you might not need a fancy office or any office at all. And that is the cost cutting approach to overhead. Overhead is the term for physical expenses you have in your business that don't contribute directly to the profitability of goods or services that you provide there, the expenses that are kind of always there, no matter what your company is doing. And that means that if you can cut and reduce those overhead expenses in a downturn, it's going to be really important because if those expenses are always there, and you can reduce some of them, you'll boost your profitability. One of the most common areas people think to reduce overhead costs is with office space. If you get rid of your office space, you don't just save money from paying less rent, you also will reduce costs in power and water and paper product use. This frees up cash and helps your company's cash flow, which is absolutely critical in a downturn, you need to maintain as much cash and positive cash flow as possible. As we look to a future with more remote work, there are benefits for workers who might work remotely in the future. For companies, if you don't have to pay extremely high rents in places like Manhattan or Silicon Valley, that'll help you boost profitability. And in terms of labor pool, if you're not just stuck with the people who are local, you might have access to more people, which means this can actually help with your expenses that you'll have, for wages and salaries. Being judicious with your overhead expenses is critical to boosting profitability. And although this is true all the time, it's absolutely critical during a downturn. Reducing costs boosts profitability and it can sometimes add more value and boost profitability even greater than if you increase sales. After all, a penny saved is a penny earned.

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