overhead cost

As we add employees, I must hire managers, and much of their time is not billable. Their salaries become overhead added to all the jobs. So our labor rate is creeping up, and our gross margin shrinking. How can I justify this, especially to myself? (Question from MM on “Ask Mike Van Horn.”)

mvh response. I see several ways to justify this to your bottom line and to yourself:

1. A good manager should pay for herself in several ways:
— Improved billing by your staff, i.e., by making sure all client work is billed for
— Improved staff efficiency via training, improving systems and procedures, better scheduling and coordination, and dividing work by specialties
You need to set targets for increases in staff productivity so you (and your managers) can track to what extent their efforts are paying for themselves.

2. She frees you up. Since you no longer have to be overseeing everything, you have more time for:
— Business development, strategic alliances—the keys to growth.
— Free time! This helps recharge your mental and spiritual energies.

3. To prepare for the eventual sale of your business, you must have a strong management team in place.

If your manager is not doing these things for you, then she is not the right person.

Here’s another way of looking at it. You’re not actually adding a manager, you’re adding a CEO. You’ve always had a manager—you! You’ve been so busy managing, you didn’t adequately fulfill your CEO responsibility. Now you can.

You just weren’t looking at your pay as management overhead. Now that you’ve replaced yourself as manager, you must account for her pay.

The new position is CEO–you—and the overhead increase goes to pay the CEO salary. But this is an essential investment for achieving your growth goals.

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