So what has a motor bike accident got to do with profit leaks, and one a long time ago at that?
It was about 5.30 in the evening and light was fading. Light rain was falling. The road ahead stretched in a gradual slope for quite a way and the nearest town was some miles back.
At my feet was my motor bike, on its side, with broken front forks and a cracked front wheel hub. It was not going anywhere.
Geographically I was about dead centre, north south, east west of the Asian side of Turkey. And I thought, "there's gotta be a way outa here"
That was over 30 years ago and there was, courtesy of a Turkish truck driver who couldn't speak English but kept yelling "mort, mort" every time he saw an accident site (of which there were many), some repairs in Istanbul with an ancient BSA front wheel with no brakes left, replacement forks, and garden pipe to make bushes to fit the forks.
The bike was and is my '69 Triumph which I still ride to this day.
So what is the business connection? Just this - have you ever been in the situation when nothing seems to be working in your business: you're working hard, you're working long hours, no time off, and there just doesn't seem to be any money. You feel like throwing the whole thing in. You know, just give up, walk away and to heck with it all.
That thought momentarily crossed my mind all those years ago in Turkey, and that is when the steely thought crossed my mind - ‘There's gotta be a way outa here!' I listened, and held onto that thought.
And so it is with the hard times in your business. There is always a way. You've just got to find it. Something is tying up the cash, or the profits are leaking. Look for the clues, find the leaks, and plug them.
About 10 years ago I had a client who was perpetually short of cash. They had grown from 3 young blokes starting a business to about 45 people, but cash was always a problem. They lived on the edge the whole time. It was hard work, and very stressful. It took a change of General Manager to recognise that their profit leak was that their business model was wrong. It was OK for a small market, but not for the size they had become. They were in the wrong market with the wrong model. It just leaked profits from the investment in time and money they were making. They now have over 2,000 employees and operate in 4 countries. They found a way ‘outa here'.So click here now
As for how I busted the forks and front wheel - that's another story.
If you would like to comment on this please contact me .
I wanted to comment further on the ‘customer service system' of which we spoke in the previous blog. And to support that I found a quote that really said very effectively the point I was trying to make. But before I get to this I just wanted to discuss the importance of the perceptions that customers form of our business.
The perception that the customer forms of your business's ability to satisfy their expectations will determine their response to the actual goods and services they receive from you. Unless your customer's needs and preferences are satisfied the image of your business, in the mind of your customer, may be quite different from the identity you believe your business has. This is sometimes referred to as a "Moment of Truth". Every time a person comes in contact with a business they form a perception of it.
And now to the quote:
"It is commonly accepted today that meeting customer expectations on quality and service is merely a ticket to play the game. The long-term winners are those organisations which consistently exceed expectations or delight their customers with cheaper, better products and services that are delivered faster. Too often however organisations, particularly in service industries, striving to provide better service than their competition, focus their attention exclusively on the people and practices at the interface with their customers.
This attention is usually in the form of customer service training supported by a number of customer service measures. The training, at worst, takes the form of so-called "smile training". At best it equips frontline staff with the knowledge and skills to deal quickly and pleasantly with customer queries, problems or complaints.
Neglecting the processes and support functions behind customer service staff is often the cause of many service improvement initiatives stalling. Frequent delays, errors or inefficiencies in the processes that deliver the end product or service to customer service staff, eventually lead to frustration, demotivation, and a reluctance to take the initiative.
Even the best customer service training soon begins to lose its impact and as customers complain, managers lament the wasted investment."
'Achieving Service Quality' Rod Smart, General Manager, Zenger-Miller Australia.
I couldn't have said it better myself.
Note the comment on "managers lament the wasted investment". I don't have to tell you what a wasted investment is; another profit leak.
What do I mean by "system" ? Think of how you actually deliver customer service.
There are two aspects of customer service. The first is what the customer experiences when they come through your door, or contact you by telephone, facsimile, e-mail or what ever. How were they treated? How quickly did you respond? Were they happy with the service or product they purchased? Will they come back?
Your front line team provides this point of contact and it is critical. Friendly, smiling staff who genuinely want to help your customers, answer the telephone quickly and go out of their way to meet the customer's needs are invaluable.
We recently did a customer survey for a client. One item which stood out in all the customer's responses was the attitude of the staff. We identified other opportunities for improvement but it was the strongly customer-focussed attitude of the staff which kept the clients loyal.
However there is another aspect of customer service, and that is - "How do you enable our staff to provide good service?" You can recruit nice staff, provide frontline training and set the right example. However if the systems and processes behind the scenes which enable your staff to identify the customer's service requirements and to provide that service aren't working, then that smile might have the be stitched in place, because they certainly won't be able to hold it there.
Customers have needs and expectations (quality, timeliness, price etc.) which must be determined. To a certain extent you react to these when they walk through the door, but how much better is it if you have done the work to determine what they are likely to be before they arrive, thus considerably improving our chances of satisfying them.
The company's system makes claims and promises regarding its ability to deliver its products and services. But can you actually find the product when it is required? Does the system say you have Item X in stock but it cannot be found? Can you fill 100% of an order, or only part of it? Can you provide the support they need when they need it? These are the "business processes" which underpin your business. Can they work better, faster, with fewer mistakes and errors?
It is these business processes you need to work on if you are to improve customer service - to enable your staff to provide the service level which will ensure loyal customers.
Finally, no matter how well the system believes it has performed it is the customer's ‘perceptions' of quality which determines whether they are satisfied. Staff have key roles in shaping those expectations through their advice, service and the nature of their relationship with clients but in the end, the customer walks out an unhappy customer, you have failed.
And you need to know. Measure, measure, measure! An unhappy customer represents another profit leak.
Ice? We're worried about leaks are we not? Well, yes, we are, and I suppose if I stretched a point I could say we are worried about running into an iceberg and creating a leak.
Actually, the metaphor is not bad. We are talking about the impact on profits of something we usually don't see. You know how it is said that you only see the one third of the iceberg that is above water. Two thirds is under water so you don't see it, and that is where the danger lies. That was what happened to the Titanic, and you don't want the kind of leak it got to happen to your business!
In this case the iceberg is waste. The bits you see you can do something about, and usually do. Things like scrap and rework if you are in the manufacturing business, customer returns or servicing complaints. I'm sure you not just fix a specific issue but also look at the trends to see if there is an underlying problem. You do, don't you?
It is the two thirds you don't see that is the problem. If you are not using your equipment properly and not getting the best out of it, that's a waste. If you are having to pay premium freight costs because some parts or supplies were not ordered on time, that's a waste. If you are making sales calls on people who are never going to buy, or at best buy very little, that's a waste. If you lose a customer for whatever reason, that's a waste. It costs more to get a new customer than to service an existing customer. If you are not concentrating on those things that are most critical to your business, that's w waste.
You get the picture I'm sure. Just as a test, for today. Why don't you do a check every hour or two and look at what you are doing, and how long you have been doing it. The ask yourself the question "Is this adding real value to the business?" If not, is that the best use of your time?
The proportion of waste that is hidden will vary from business to business. In manufacturing businesses the waste tends to be more visible. It's above the water. However for service businesses it tends to be much higher, and can be as high as 10 times that which can be seen.
Whatever the form of the waste, you are not recovering a dollar from it. So it is a profit leak.
We all have competition for our business, one way or the other. Sometimes it's direct competition, sometimes its from substitutes. You know what I mean by that - am I going to spend my precious dollars on a latte or a wine? Sometimes the competition is fierce, they're all out there, determined to get your share of the business and preferably get you out of the business. Sometimes it's relaxed, and you are all happy with your share of the customer's dollar.
But how much time do you spend worrying about the competition, now that's the question. Now I'm not saying you shouldn't keep an eye on the competition. All the good businessmen I(and women) I know have a very good idea of what their competition is up to. They will have a file on each competitor and drop in anything they come across that demonstrates their strategies or their results. And that is good practice.
No, what I'm talking about is having an obsession about the competition, an obsession that occupies an unhealthy proportion of your precious management thinking time. Face it, probably the only commodity that is shorter than cash in business is management time. Not just managing time, but time to think about you business, where it is going, and how it can be improved.
If you are obsessed about your competition I can guarantee you will have profit leaks.
What else could you be doing with that time, what else might you be doing that will have a more positive impact on your profits? Think about your business, not the competition. The returns are greater, and you will sleep better at night.
Last night I attended a briefing an how to submit an entry into our regional tourism awards. My wife runs a conference and event management company. Regional tourism awards might sound a little ho hum but if you win your category the ‘rewards' are significant, and you get to compete in the national (Australian) Tourism Awards against the winners from the other states. Given that Australia has only 7 states, despite having the same land mass as continental USA, if you can make the nationals, you are in with a real chance.
Of course, winning the nationals is even more rewarding. There's not only the direct financial prizes but the publicity that follows is, well, almost priceless. Great for building your business.
But it is not those rewards that I wanted to talk about. To put together a reasonable submission requires you to step back and have a good look at your business. And it is this that gives you the real reward.
In an earlier blog I commented on being involved in the regional judging for the Telstra Small Business Awards. Over the years, if there has been one constant refrain from people who have submitted, it has been on the benefits they found from being forced to step back and look at their business. The same refrain was being expressed from people who had previously submitted for the tourism awards.
Last night we were being asked to look at what sets us apart from our competitors, what innovatory changes to benefit clients had been made, our business vision and key features of our business plan, who and why were our target markets, our communications strategies, customer service strategies, staff training, risk management and contribution to tourism in our area.
Now that might sound like a pretty standard list but most of us are so busy being busy that we don't take that step back and evaluate what we are doing. What's more, the awards process asks us not only to say what we were doing, but demonstrate the actual outcomes of these strategies or steps. That makes it much harder to be a little ‘generous' with the truth!
So I would urge you to consider entering awards is your area. It makes "every one is a winner a truism." Oh, and Good Luck!
And the answer is of course "one bite at a time". But seriously, there's a reason for the lead. It is the same situation when you see a long flight of stairs ahead of you, and you have to go through the doorway at the top. That is where the money is.
You not going to get to the landing at the top in a single bound (unless you're Superman of course). If you tried you'd probably fail. Which is why so many attempts at solving problems in business fail. People rush at them, try and fix them "in a single bound", find it's too hard, and give up. Like eating the elephant, you're going to take those steps a step at a time, and find getting to the top is no problem at all.
So you've found the profit leak and you want to fix it. It may well be fixable in "a single bound' but it may be, like the elephant, more than a meal in itself. And I know I'm mixing metaphors, but you get the message.
To plug the leak may take time. Time is often something we don't have. There are enough distractions in the day without adding to them.
So whether it's the size of the problem, or chaos during the day, if you just take a step at a time you will plug the leak. You'll overcome the problem without hitting a brick wall.
In ‘consultspeak' this is called "incremental improvement" and graphically it's usually shown as a flight of stairs.
Say you have identified a product or service that is just not giving you the returns it should. By working on it a step at a time, you may be able to improve profitability by, for example, 2% a week. At the end of the month that is 8%, and at the end of 2 months that is 16%, plus the cumulative improvement as well. So if your Gross Profit was 20% to start with, now it's 36%. That is starting to make a real difference.
So that's it - incremental improvement. Take your profit leak a step at a time, and you'll plug it it.
Principles relating to the measurement of how we provide our products or services. They came from a variety of sources but collectively are useful. I have added some comments.
Use data to measure, monitor and control - not to blame. Remember Dr. Deming, "Wherever there is fear, there will be wrong figures." Your people will not be keen on collecting data if they feel that all you are going to do is hit them over the head with them. Without information there can be no action. It has to be the right action. Also remember another of Dr. Deming's key precepts, that 85% of problems were caused by the system, not be people.
Price's Dictum - No inspection or measurement without proper recording; No recording without analysis; No analysis without action. Once you have the information and it has been analysed, the required action becomes obvious. And you wonder why you didn't do something about it before!
Do not look under street lamps - it can be tempting to settle for the data that is easy to get rather than that which is useful. (This is sometimes expressed as "Avoid using research as drunks use lamp posts - for support rather than illumination".) Certainly this data can be illuminating, but it will probably not be complete, and may not address the issues you face.
Always start by asking the questions : "What do I need to know?", and "How am I going to use that data when I get it?" Then search for the data which will answer the first question.
Seek to use predictive measures - wherever possible move to the collection of in-process measures that will enable you to predict performance. Why - because if you know something is going to go wrong, then you can do something about it, rather than have to try and recover the situation after the time it had occurred.
Align measurement with intent and values. Ensure the measurement of processes and the business are aligned with their intent and values. What are you trying to achieve? Where do you want to go. Pretty obvious isn't it? So surely your key measures should tell you how you are going here
A final note. Collecting the data must be relatively easy, otherwise people will soon get tired of collecting it. So that means good systems. And the information should be easily accessible, and available in a timely fashion.
The margin we make over the cost of providing a product or service is the money we have to contribute to pay overheads (relatively fixed) and then when we have covered those, to our profits.
I'll talk about breakeven another time but this time I wanted to touch upon two examples where it is easy to get confused by the impact of sales versus margins. These are bad debts, and promotional campaigns.
Lets take bad debts first. Of course this does not apply to you if you get cash payments on delivery, or better still, payment before delivery. A significant proportion of businesses invoice their clients on delivery of the product of the service. Your Terms of Trade may vary anywhere between 7 days to 6o days. Here I'm talking about when you require payment, not when you actually get paid. Unfortunately we often find that the bigger the client, the slower the payment. So what happens when we have a bad debt?
Say your sale was $1,000 and your Gross Margin was 35% ($350). The sale goes bad for what ever reason and the client does not pay. Now it is easy to assume that you have to make another sale of $1,000 to recover your position. Easy to assume, but wrong!
To get back that $1,000 you have to make enough profit to get the money back, because a significant proportion of the new sale will, as before, be the cost of providing the cost or service. And that amount we can calculate by dividing the sales figure ($1,000) by the Gross Margin (35%). And that gives the princely sum of $2,857, all of which ignores the cost and effort of achieving the new sale.
So it makes sense to set yourself up so that this situation does not arise. Policies and procedures help, as does getting paid up front, or at least a reasonable down payment. In these days of multiple credit cards, securing a credit card imprint can be useful. In other words get the client or someone else to cover the debt. You are not in the banking business.
And so to promotional campaigns. Much the same situation applies, except that it is harder to measure.
If you do decide to calculate return on a marketing campaign: when comparing cost to returns, "returns" should be your profit not your gross sales. If you spend $1,000 on a marketing effort and generate $1,000 in sales, you are losing money; you are out the cost of product or services that you sold for $1,000. You have only broken even on a marketing campaign that costs $1,000 when you have sold enough product or services to generate a $1,000 PROFIT. How much sales that requires depends completely on your products and your profit margin.
The two blokes below me looked like they were statues in some frozen tableau - frozen in the squat position, arms thrust out in from of them and only inches from where a screaming, roaring monster was going materialise.
We were in the corporate box of a supplier at the V8 Supercars and directly over the pits.
For the benefit of non-Australian readers I should explain that the V8 Supercars is the main automotive racing circuit in Australia. The cars, in theory at least, are based upon standard sedans, but heavily modified for racing. The heavy modifications replace just about everything apart from the name badge, but you can still see the family resemblance. The circuit includes most Australian capital cities and, for the first time this year, they will also be racing in Shanghai.
I guess you have to be a bit of a petrol head to be able to take the noise, but there are compensations, like the hospitality we were offered, and the networking opportunities. But that is not what I want to talk about. Rather both my wife and I were struck by the performance of the pit crew in the bit directly below our box.
Most of the pit crews dashed to their car as soon as it came into the pit, wielding their tools and changing a tyre in unbelievable speed. I said "most of the teams" and ‘dashed".
The team below us were in a minority of one, and didn't dash anywhere. Instead, they were already in position, crouched at wheel height and ready to move. One held the tyre off the ground (you try that even with a standard auto tyre) ready to thrust it on the wheel, the other also crouched down, with his pneumatic tool ready to get the wheel off. So they didn't need to move.
The car would come in, one step forward by the tool holder and the wheel was off, one step forward by the wheel holder and the tyre was on, another by the tool holder and the wheel was secured. And the car was off. It was very impressive.
But what really struck me was that they had a system, their system was far superior to the competition, they worked as a team and they had obviously had practised until they had the whole thing down pat.
Many of us have played sport, particularly team sports and will remember well the endless drills to make sure we knew our moves and could carry out the team plan perfectly when we get on the field or court. So why don't we practise our moves and teamwork in our business to deliver speedy, great results?
Good businesses do. That pit crew reminded me of a client we worked with a few years ago. They were fabricators, making products for the housing industry and we were asked to help them do a business plan which would transform their business. In preparing the plan we did a customer survey, and that was when the ‘ah hah' moment occurred.
One question we asked related to the importance of ‘on-time delivery'. We had defined this in terms of a specific time e.g. ‘10.00 on Tuesday morning', and not just ‘Tuesday morning'. That turned out to be the critical question. You see, the company didn't think it particularly important. In fact they ranked it about 10 in a 1 - 10 list of service criteria. The customers however, ranked it 1. So what chance did the customers have of getting on-time deliveries in that situation?
Let me tell you that the system they designed as a result in their business plan was designed to give customers on-time delivery, every time. They really worked at it.
And, like the pit crew below us, they consistently beat the competition.
It may be a presentation, carrying out a service or doing an installation. Develop the system, and practice it. Practice makes perfect as the old saying goes. Improve that presentation, practice closing a sale - they all prevent profit leaks.AdamG
Some profit losses are pretty obvious - so you fix them.
BUT, what if you don't know profits are leaking, cash out the door?
Possible leaks could be anywhere.
Are there some clues or symptoms that are tell-tales?