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I thought I would start a new thread to address the overhead issues that arose in another thread.
What follows is for illustrative purposes only. Most companies would have other overhead items not listed here. I kept it short just to keep it simple. But the same principles will apply.
In the first two examples below I am assuming that each painter will work 160 hours per month and jobs are sold at $40 per hour. I included materials in the $40, again to keep this simple. I used labor costs of $20 per hour, which includes all labor burden.
This chart shows expenses with 2 painters. Revenues are $12,800 (2 men, 320 total hours, $40 per hour).
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The overhead in this example is 44.1% of revenues. (Again, in a real life company there would be other overhead items and actual overhead would probably be closer to 50% to 55% of revenues.) Net profit is 5.6% of revenues.
Now let’s look at what happens if the company adds 1 painter. The hours worked will increase by 160, which will increase revenues to $19,200. As a result, labor and material costs will also increase. However, overhead items will not increase. Rent, insurance, phone, etc. will not be impacted by the additional painter. Advertising may need to be increased to generate more leads to keep an additional painter busy, so I do show an increase in that expense. But all other overhead expenses would stay the same.
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The result is that overhead drops to 30.7% of revenues and profit increases to 17.1%.
Let’s look at one final scenario.
We’ve hired the additional painter but we also reduced our selling rate to $35 per hour, so total sales are now $16,800 (3 men, 480 total hours, $35 per hour).
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Even at this reduced selling price overhead has decreased as a percentage of revenues (versus the original scenario) and profit has increased.
I hasten to add that all of the above is hypothetical, but the numbers are realistic. As I said, there will be other overhead items. The new painter may not be as productive and thus actual revenues do not increase as much. The owner may wish to draw a larger salary since he is managing another person. Numerous other factors can also have an impact on the actual numbers.
My primary point is that hiring additional painters does not necessarily and automatically increase overhead. Direct costs—labor and materials—will increase more or less proportionally with the number of people hired.
At some point, hiring additional painters will increase overhead—an office assistant may be needed, a larger office may be needed, etc. But going from 2 painters to 4 will seldom necessitate such additional expenses.
Brian Phillips
What follows is for illustrative purposes only. Most companies would have other overhead items not listed here. I kept it short just to keep it simple. But the same principles will apply.
In the first two examples below I am assuming that each painter will work 160 hours per month and jobs are sold at $40 per hour. I included materials in the $40, again to keep this simple. I used labor costs of $20 per hour, which includes all labor burden.
This chart shows expenses with 2 painters. Revenues are $12,800 (2 men, 320 total hours, $40 per hour).
The overhead in this example is 44.1% of revenues. (Again, in a real life company there would be other overhead items and actual overhead would probably be closer to 50% to 55% of revenues.) Net profit is 5.6% of revenues.
Now let’s look at what happens if the company adds 1 painter. The hours worked will increase by 160, which will increase revenues to $19,200. As a result, labor and material costs will also increase. However, overhead items will not increase. Rent, insurance, phone, etc. will not be impacted by the additional painter. Advertising may need to be increased to generate more leads to keep an additional painter busy, so I do show an increase in that expense. But all other overhead expenses would stay the same.
The result is that overhead drops to 30.7% of revenues and profit increases to 17.1%.
Let’s look at one final scenario.
We’ve hired the additional painter but we also reduced our selling rate to $35 per hour, so total sales are now $16,800 (3 men, 480 total hours, $35 per hour).
Even at this reduced selling price overhead has decreased as a percentage of revenues (versus the original scenario) and profit has increased.
I hasten to add that all of the above is hypothetical, but the numbers are realistic. As I said, there will be other overhead items. The new painter may not be as productive and thus actual revenues do not increase as much. The owner may wish to draw a larger salary since he is managing another person. Numerous other factors can also have an impact on the actual numbers.
My primary point is that hiring additional painters does not necessarily and automatically increase overhead. Direct costs—labor and materials—will increase more or less proportionally with the number of people hired.
At some point, hiring additional painters will increase overhead—an office assistant may be needed, a larger office may be needed, etc. But going from 2 painters to 4 will seldom necessitate such additional expenses.
Brian Phillips
