The recent economic impact of the Coronavirus pandemic has caused many snow removal and ice management business owners and operators to do something they should have been doing beforehand: cut overhead. After all, no matter the size of the business, overhead, plays a significant roll in both the operation’s survivability and profitability.
Overhead is defined as: “ongoing business expenses not directly attributed to performing a service or creating and selling a product.” That often-overlooked overhead can yield significant savings with a few strategic moves.
Strategic cost-cutting can help lower overhead costs, but it is not about getting cheaper. Instead, overhead cost-cutting helps ensure a snow removal operation is ready for growth. It focuses on the aspects of the business that are controllable, while freeing up resources to fund infrastructure and future growth.
REPAIR OR REPLACE
Any business that relies on vehicles, specialized equipment or machinery faces the overhead cost of maintenance and repairs. Reducing overhead with vehicles can be achieved by switching to more fuel-efficient models such as diesels or hybrids.
While repairs might make sense for a machine, vehicle or equipment just out of warranty, it might not be true for some that are five years old. Some snow removal and ice management business owners and managers compare the estimated cost to repair to the fair market value of the asset. If the repair cost is the same or greater than its book value, it might be time to replace.
Many machines become functionally obsolete before they are no longer repairable. Here the best strategy may be to forecast future repair costs. Plus, the cost of removing the old and installing the new machine should be factored in.
SELLING IT OFF
Most snow removal operations have old, unused or obsolete equipment and supplies on hand. There’s little point in continuing to let that equipment take up space when it could be contributing to the bottom-line. Selling that equipment or excessive supplies may produce income. Donating that unused equipment or supplies to a charity or non-profit will generate a tax deduction for charitable giving. And, there is also a tax deduction, equal to the book value of that unneeded equipment if it is “abandoned,” not merely unused but actually disposed of never to be available again.
BUY VERSUS RENT
Renting versus buying, which is better? As a general rule, it’s usually a good idea to buy small equipment and continuously needed hardware. Today’s tax laws and immediate write-offs also favor purchasing – at least for a snow removal business that has the cash for a down payment and/or financing lined up to cover the cost.
Of course, with some business assets such as the snow and ice removal operation’s shop or offices, leasing or renting is the only option. Fortunately, lease costs can be reduced by negotiating a new deal with the landlord, the operation could move to less expensive premises or, in some situations, buy the needed shop, warehouse or office building.
And, don’t forget to factor in the new accounting rules that mandate leases be shown on the operation’s financial statements as a liability – impacting the view of the business revealed to potential investors, lenders and suppliers.
LOWER FINANCE COSTS
Financing is frequently used as a selling tool. The equipment seems overpriced, but you can acquire it for little or no down payment and small periodic payments over its useful life. This may not be an issue if the equipment is either essential or can save the business money while conserving its cash. But, in most cases, seller financing is not such a great deal.
Sellers often use financing to make their products more attractive and sometimes make more on the financing than on the sale. Separate the two. Evaluate purchases based on the cash price, then check out financing – if needed.
Reducing the cost of financing can also be accomplished by converting variable rate debt to fixed rate debt. A snow removal business with a line of credit might think about checking the interest rate on a five-year loan. In a raising interest rate environment, it might make sense to look at a rate along with a built-in installment plan. That way, the line of credit remains available for emergencies.
If the business has an unused line of credit and an outstanding credit card or revolving charge card balance, it might make sense to stop paying the credit card company’s high interest rate and start paying the bank’s lower rate. Admittedly, the line of credit may carry a floating interest rate, but the point spread is usually substantial.
Debt reductions can often be accomplished by transferring the outstanding balance on a high-interest rate credit card to another one to enjoy a honeymoon period of low or even zero percent interest rates. Unfortunately, the losing bank can be expected to find a way to impose a penalty fee for making the move.
Many snow removal and ice management business owners associate “cutting” overhead with “firing people.” While the easiest way to cut costs is often cutting workers, it can also be the most expensive in the long term. Fortunately, there are more creative ways to reduce labor costs.
Workers might consider part-time employment or take unpaid leave. The snow removal operation could investigate so-called “gig” workers, freelancers and contract staff to reduce overhead costs while still maintaining staffing requirements.
Rather than firing workers only to have to eventually replace them, consider reshaping their role and investing in training them to contribute in other ways. With a “fluid” staff the operation can continue maximizing their value while avoiding the financial drain of new hires and low morale. Other strategies include evaluating whether workers are under utilized. If new employees are needed, then hire someone with multiple strengths.
By being willing to purchase (or commit to purchasing) large quantities of needed supplies at once, the snow removal operation will be able to lower the amount spent on each individual item. Admittedly, things such as storing costs must be taken into account but, generally, bulk ordering is a great way to reduce costs.
MARKETING PAYS NOT COSTS
Few snow removal contractors and business owners seem to realize how much advertising and/or marketing pays. However, if sales and marketing costs are dragging the operation down, seeking less expensive ways to market it is an option. The operation can, boost marketing by increasing use of social media.
Scaling back on promotion doesn’t mean compromising on marketing. Posting more often on Facebook, YouTube, Twitter and Instagram is an economical option. Writing blog posts and articles can increase traffic to the operation’s website and business. Offering incentives for referrals or social media reviews – and recruiting brand ambassadors, those so-called “influencers,” are among the ways of expanding the customer base on a smaller budget.
INSURANCE THAT PAYS
In addition to general liability and property insurance, there is also business interruption insurance. Surprisingly, insurance policies exist that cover monthly overhead expenses in the event a contractor becomes disabled due to illness or injury.
Business Overhead Expenses insurance plans cover most overhead expenses including:
- Employee wages and benefits
- Mortgage principal and interest or rental payments
- Property taxes
- Accounting fees
- Business insurance
Designed to cover temporary periods of disability, these policies have maximum payout periods and do not cover the cost of hiring temporary replacements.