The Overhead Monster in your Ceramic Business – Part one

Mary Rab

This story is heavily influenced by my interview with Mary Rab of the Benson Agency Real Estate, which is the leading brokerage firm in the city of Oneonta, NY. She had a lot to say about carrying overhead... thanks Mary!

The definition of overhead costs is the same as for fixed costs in accounting lingo. The term fixed costs tells you the story – those are the costs you don’t get away from, at least not in the short run.  In the ceramic arts business, which is, in its majo
rity, composed of small units, your decisions in regards to overhead can make or break your business.  In the business world in general, all companies with less than 500 employees belong the category of “small business”, so you probably qualify.

In your daily decision making you must therefore define whether or not a particular cost is for the short term only or for the long term – which implies fixed costs.

First the bad news – if you don’t pay attention to your overhead expenses before you commit to them – it will turn costly and, sometimes, even ugly.

Then the good news – there are many ways to minimize them, all the way from not having hardly any to having and keeping them very, very low.

For many decades I worked in and owned manufacturing companies where you need plant and equipment, employees in the office and in the factory and with all brackets of pay, all the government-imposed costs and all the unavoidable costs that come with the structure of manufacturing. The list of expenses and costs is almost endless. You are listening to an expert in fighting overhead for the better part of my working life.

Believe me, overhead can turn into a monster – a very hungry one. So let’s discuss how you look at this business aspect and how you rein in the monster – before it bites you.

First step – take a look at your business for the next three years

The reason I say three years is that I will recommend business plans for that period of time. Beyond three years, it’s hard to see clearly. The changes around you make a look into a longer period than that very hard to see clearly – the mist of too long a perspective.

If you plan on being alone in your business at home, you do not have a major problem to avoid disproportionately high overhead costs. But you also limit your abilities to generate much income in ceramics.

If you were in the .com  industry, it’s easier, since you do not need much space, no raw materials to store, practically no machinery except a computer – no kilns, wheels, mixing and lifting equipment, racks for storage dry clays and glazes as well as semi-finished and finished inventory etc. etc. Space then becomes a secondary challenge. However, you have to deal with other fixed costs, such as contracts, consultants, royalties, soft-ware costs and much more.

Will you need extra room within the next three years? Or can you make do with your garage or your basement?  Or can you share space with other like-minded artists?

You may have to start your business and find out. My advice to you is to try it at home first, then – when physical expansion becomes unavoidable – you have the experience of how space consuming your business will be, plus – you already have an established income stream from your customers to rely on.

Second step - let’s focus on your most important fixed cost: The rental/lease for your locale.

Before you take this step, sit down with a very close friend, associate or trusted advisor and discuss this step. Your question: Do you think I “have it” to commit for a longer term in a rented space? This trusted individual must be someone who knows you very well, who cares about your future and who does not shy away from speaking his/her mind. You want to know somebody else’s true assessment of this important long term commitment.

If you decide you need space, here is a list of things to consider:

  1. First, contact a real estate business handling commercial/industrial properties. The agent will be able to give you some guidance on space vs. cost within its radius of operation.
  2. How much space will I need? Your experience in the business you are in, whether you are a potter, a porcelain artist, a teaching studio, a china painter, a porcelain dollmaker or another type of ceramic business will give you an idea. Rather underestimate than overestimate. Think efficiency to keep the lease cost down.
  3. What kind of area do I need to be in? Can it be industrial, which is cheaper, or does it have to be a more upscale commercial site?  This will hinge on your need to see/teach customers or other visitors or if you need space to show your products. In short – how much customer traffic does your business need?
  4. What length of lease term do I have to contract for? Be tough in your negotiations here. Since you cannot get the best (= a 30 day automatically renewable lease) you would probably have to settle for something between 6 months to two years.  If you have a business plan, you should have the estimated cost of your rent built in right there. Retrieve your plan and consult with it. Tip: Multiply the monthly lease cost by the number of minimum months and get a realistic view on the amount of money you are about to spend.
  5. How about proximity to my home? Several factors influence this decision – public transportation, cost of driving, cost of parking (for you and potentially for your staff and/or customers). Also consider and the length of commute and traffic pattern to get to and from your place of work (which might influence your working hours). I live in Upstate New York and have several customers in NY City and surrounding area. It is not unusual there to have a studio (or share one with other ceramicists) on a second or third floor. This, combined with the cost of parking, certainly rules out commuting in your car.
  6. Since you are in the business of ceramics, which requires the use of kiln(s) – find out all there is about electricity – capacity, cost, insurance and other. Let your real estate agent be clear on this so that you don’t have to make any “dry runs” to inspect a facility that does not fit your business.
  7. Describe, in detail, what your business is all about. You don’t want any nasty surprises as to village, town or city zoning ordinances that would impact or limit what you can do.  List all your requirements and let the real estate agent read through it, answer questions and make sure the agent becomes totally aware of finding out if a potential site will suit you.
  8. Bring our credentials. No serious landlord will accept you unless you can prove who you are and what your business can generate in terms of income. Bring your “books” or whatever credentials you have or can get to prove your creditworthiness. Dress for the occasion – the landlord’s first impression is important. Give a copy of your financial background to your broker – if any. References from business and personal contacts should also be brought.

The search

Take your time. You are about to make long-term decision and to find the ideal place may take time. Besides, if you negotiate a lease under a time constraint, you have the lower hand. Do not let anyone involved in the search know how keen you are to find a place. If you are interested in a place, play it cool and walk away to “think about it”. Keep looking for a better deal if you think there is one. Chances are that the place will still be there next time you re-visit – at which time everybody will know how keen you are.

Then make an offer that suits your plans. In some cases, you have to stick to your plan and sacrifice what might be perceived as a good deal.

If market conditions are tough, like they are right when this is written (April 2011), time is on your side. In my home town of Oneonta in Upstate New York, the lease for what you are looking for is as low as 3-4 dollars per square foot. Use that knowledge in your search and negotiations. If you search for something in New York City you might get that lease only if you share space with other ceramicists.

Next time, in part two, we will discuss other overhead types and how to best approach them.

You can find part 2 of the Overhead Monster here.

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© 2011 by Rolf E. Ericson, Oneonta, New York, publisher. All rights reserved. Photocopying, reproduction , copying, or redistribution of any kind in printed or electronic form is strictly prohibited without written permission from the publisher.