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Is Your Company Top Heavy?

A very important question small businesses need to ask, are they top heavy? The definition of a top heavy is a company that has too many managers/ executives employed. Another definition of top heavy is a company that has too much debt in relations to its ability to generate revenue or profits; therefore, top heavy could also mean a company that has too much overhead for its current capacity to sell and generate profits.

Why is this important to know?

Top-heavy companies have more obstacles to overcome financial shortfalls because they may have higher fixed (payroll, rent, etc.) and variable costs (telecommunications, employee expenses, etc.) than companies that are not top-heavy. If a company has a significant allocation of their monthly budget to administrative costs, the risk of significant cash flow short falls is high. The company’s breakeven point is higher due to being top heavy.

Another risk with top-heavy companies is the set back of having too many cooks in the kitchen. A company that has more managers/ executives than the company’s operations actually requires could be counter productive if not detrimental to the company’s financial stability. An overlap of management is not effective, and often it could create unwanted, avoidable conflicts between staff & management.

The following is a list of setbacks that could occur from small businesses that are top-heavy:

  1. Funds that are being allocated to management salaries could be invested into the business to generate more sales, reduce cost of sales, eliminate debts, and distribute profits to owners
  2. Decisions could take twice or three times as long because a consensus could not established within a reasonable time frame
  3. Opportunities to improve the business could be overlooked due to management/ executives being distracted or due to lack of oversight of the entire business operation.
  4. Staff morale may decrease due to lack of transparency in management.

How does a company fix this problem?

Small business owners should be knowledgeable in the activities of their staff and managers. The initial step is to establish an organization chart outlining the person on top and work downwards. If there are “managers” without employees directly reporting to them, then there should be a further analysis. Small businesses cannot afford to have high overhead costs; therefore, the owners should conclude the management structure they desire and fill it with the right people.

Small business owners should be knowledgeable in the activities of their staff and managers. The initial step is to establish an organization chart outlining the person on top and work downwards. If there are “managers” without employees directly reporting to them, then there should be a further analysis. Small businesses cannot afford to have high overhead costs; therefore, the owners should conclude the management structure they desire and fill it with the right people.

Operating a top-heavy company could mean failure is imminent. Being proactive to reduce unnecessary administrative costs is crucial. Speak with an accounting professional (ideally your corporate tax accountant) to discuss cost allocations if you are not able to conclude if your business is top-heavy. An initial investment for professional advisor can itself back over and over again.

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