The Major Cause of Profit Leaks

This is the seventh article on “profitability”—a guide to help understand and develop the true significance of its impact on a business: revenue growth, peace of mind and freedom to do about whatever you want to do.

Have you ever taken on a simple plumbing job only to find out that when you had the project completed (so you thought) a  leak developed?  That has happened to me scores of time.  Once in our Anderson house we remodeled the kitchen.  One of the copper pipes in the ceiling had a fitting I couldn’t get to stop dripping.  After calling an official plumber, he had it fixed in 10 minutes only to find out an hour later that the pan I put under the fitting started dinging (it still leaked).  The plumber came back, left his truck in neutral; it rolled down the hill and hit a tree. It wasn’t a good day for that plumber.

Businesses also have leaks, but they are of the silent type unless you have a way of spotting them.  There are places that are leaking cash every minute of the day and we don’t even see or hear it.  Here are list of areas where profit leaks occur in just about any business and their causes:

  • Not managing to a monthly (therefore yearly) profit target
    • The bottom line should really be the first line we look at, not the last
    • Profit should be targeted, not a surprise at year end
    • A monthly profit target/goal is an easy way to tell if everything else is working correctly
    • That is why this is at the top of the list and not the bottom
  • Revenue
    • Price reductions creating lower margins
    • Decrease in revenue
    • Imbalance in revenue mix, selling more low margin products vs. higher margin
  • Cost of goods
    • Labor and material go up as % of revenue
    • Productivity decreases labor increase
    • Sub contractors used vs. own labor
    • Not evaluating COGS by product line and tracking it monthly
  • Overhead expenses
    • There is no budget for expenditures
    • No one is in charge of managing expenses
  • Forgetting that electricity is money
    • Leaving the heat on over the weekend
    • Leaving the A/C on over night or weekend
    • Not paying attention, no one is in charge if everyone is in charge
  • Employee turnover
    • Hiring the wrong people – assessments are a great tool to impact this area. It is estimated that a wrong hire will cost 30% of their annual wage.  A pretty expensive proposition.
    • Hiring too many people – not knowing the relationship between labor hours worked and revenue generated
  • Protecting your most important assets – your employees
    • Communicating with them
    • Understanding their needs and family
    • Finding out what motivates them and creating ways to help them
    • Growing them through mentoring or training programs
  • Managing accounts receivable
    • Place someone in charge of A/R
    • CEO review A/R at least monthly
    • Question past due accounts and find out the why of the why
  • Not managing the balance sheet
    • Working capital, current ratio and debt to worth needs to be evaluated at least quarterly to make sure key balance sheet relationships are in line
    • Too much debt or not enough debt can impact profitability
    • Too much cash or not enough cash can impact earnings

This week, listen for those leaks.


Dan Lacy

The Business Growth Coach