Is Your Business “Leaking” Profits?

Is Your Business "leaking profits"?

Four Huge Profit Holes that Could be Costing You More Than You Know! How to Read your Income Statement and Ask Deeper Questions.

I have been working with a few business owners lately who have discovered profit leaks that are costing them thousands of dollars. What are profit leaks, or profit holes? They are small, simple expenses on your income statement that, by themselves, don’t look like much but, over the course of a year, are costing thousands of dollars.  

When you look at the bottom of your income statement there is a list of expenses, and you ask yourself and your leadership team how you could save money on each item. For most companies, payroll is your biggest expense. And your team is your most valuable asset.  But are there things you can do to save some money along the way? There are some important questions to ask yourself and your management team, including the following: 

  • Do we have enough staff to do our job properly? 
  • Who does our best work? Who does not?
  • How much do we invoice per employee? 
  • How can we improve this ratio? 
  • Are we paying overtime?  Why? 
  • Can we reduce overtime through streamlined and improved scheduling? 
  • Are our people making our company money? 
  • Are our compensation packages competitive? 
  • Are we at risk of losing people? 
  • Are we at risk of underpaying, or overpaying, people?
  • Are our benefits packages competitive? 
  • Do we shop around for the best benefits packages? 

These are just some questions you can ask to set up a successful, productive, and engaged team.

One example of how asking questions can help find a profit hole is as simple as defining what start and end time means. This may sound trite, but it’s important. What does start time mean? Does it mean the time to arrive to work? If so, how long does it take your employee to actually start work? If they work in the field, how long does it take them to get started on a piece of equipment, or to show up at the work site and figure out what needs to get done? How long does it take to start a safety or team meeting? If you are a service company, what time does your first client arrive? For the example of a spa, if you can fit in one more person in a day, that makes a huge difference over time.  But let’s look at the math.  Imagine it takes 10 minutes for an employee to put away their coat, purse, briefcase, tools, or whatever they bring. Imagine they brought a coffee and want to finish it and then use the washroom. Whatever the reason, if you don’t define that start time means “at your desk, ready to work,” or “behind the counter, apron on, ready to serve,” or “shovels or buckets in the ground,” or “patient or client in the chair, ready to work,” that 10 minutes it takes for an employee to be ready to work can cost you thousands over the course of a year. Think about wasting 10 minutes a day. That’s 50 minutes a week.  That’s 200 minutes a month. And that’s 10,000 minutes a year. And this is just one employee. Imagine you have 10 employees; how much is this small definition of when work starts costing your company? 

And this profit hole is not your employees’ fault.  If something as simple as start time is not defined, an employee is going to arrive at that time. Studies show that it takes about 5–10 minutes for the average employee to start working after they arrive. Stating that you mean start time as “ready to work,” not “time to arrive,” plugs this leak and can save you thousands of dollars over time.

Another profit hole that employers don’t think about is the potential for part-time or contract work rather than hiring another full-time employee. If your team is slammed but feel you can’t justify a full-time position, or you can’t find the skillset you need, rather than risking team burnout, there are other options such as hiring a part-time person, contracting one or two recurring tasks out, or even hiring a part-time person to work remotely. These options can not only save you money, but they can also help you streamline quicker than having a full-time employee.

A third profit leak can be with supplies. Supplies are defined as the items needed to produce your products and/or services. If you purchase products and/or supplies, then please ask yourself some of these questions: 

  • Are we competitively bidding these purchases or just sending blanket purchase orders over to vendors we’ve used for a long time?
  • Where do we have excessive production supply waste?
  • Do we lose supplies due to damage or waste?
  • Are we keeping good inventory on hand, or are we running out at the last minute or paying rush-service fees to get supplies delivered same-day?
  • How much production time are we losing due to poor supply inventory management?
  • Are we tying up cash and valuable workspace by ordering too much at once?
  • Are we taking advantage of volume purchases and fast-pay discounts?
  • Are we buying inferior supplies to save money but end up costing us more money due to complaints from our clients, returns, or similar?
  • Can we find less expensive products that would accomplish the same thing as our existing higher-end supplies?
  • Do we have too many people making the purchases to the point where we’ve lost control over purchasing?
  • Are we still using vendors that consistently deliver late and send us wrong orders?
  • Are we considering the necessity of specialty supplies when quoting customer projects?
  • Do we take supply chain issues into account when we quote our projects? 
  • Do we have proper supply inventory tracking, or is there a chance some of our stuff is “walking out,” getting lost in company trucks, or similar? 

Who orders supplies? How do they order? What do they order? Do you have shop supplies that seem to take up the entire storage room? Do you have office supplies that fill the room because you “saved money on purchasing in bulk” but probably won’t go through that amount of paper over the next 5 years because you have now gone paperless? Do you have cleaning supplies that you’ll probably never use? These are all questions to ask and then build a process around to ensure you have the right supplies at the right time to do the quality work you need to do.

The final profit leak I like to discuss is around advertising and marketing.  How much do you spend on promoting your business? Is it too much? Is it not enough? How do you know? Do you measure your advertising and marketing tactics? If not, how do you know it’s working or not? What is the ROI of your advertising? Have you defined your target market? Does your marketing message speak to your target market? Does your message speak about the benefits and how it solves a big problem for your clients?  Have you defined your brand? Do your marketing materials clearly show consistency and state your message, have the same colors, show the same logo? If you don’t know the answer to these questions, then perhaps working on a process to understand if your marketing and advertising is resulting in an ROI for your company is a great start.

This is just the beginning of how you can look for profit holes by looking at your income statement.  Perhaps setting a goal of reducing expenses by a certain percentage over the course of a year is necessary. Using the example of defining start time could save you thousands over the course of a year.  Where else could you save money? Where else are you leaking profits? Asking yourself and your leadership team these in-depth questions about each expense line item could be the difference that adds a lot of money to your bottom line over time.  

Looking for more support? The Thrive Business Strategies team offers a no-obligation one-hour clarity session to see if Business Coaching is right for you. Contact us today.