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
- splitting head, runny nose, cough, sore throat, congested chest. All very unpleasant, and not helped by knowing there is no real cure. What you are experiencing are the symptoms. The underlying problem is deeper and probably needs antibiotics.
It is however important to treat the symptoms. I well recall my doctor explaining that this does make a different. When the body no longer has to fight the symptoms it is much better placed to deal with the underlying virus.
When your business is leaking profits there are usually a number of distracting symptoms. Very often they are perceived as the problem whereas they are really indicating that there is an underlying problem.
The symptoms may include shortage of cash and having to deal with angry creditors chasing payment, very wearing and stressful when you just don't have the money to pay them. Sometimes in a small business owners find themselves not taking a full pay in order that their employees can get their pay. Other symptoms can include lack of time; you're running from one crisis to another, putting out fires. So you don't have time to put your head up over the parapet to see what is happening with the business. They may also include equipment breakdowns (no maintenance), continually correcting paperwork (no procedures, no time for training so more mistakes), and things creeping up on you unexpectedly because you have been distracted from thinking ahead.
While the ultimate answer is dealing with the underlying problem - identifying and plugging the profit leaks so that you are making an appropriate profit, dealing with the symptoms can help. Dealing with the symptoms may give you time and resources to get an and solve the underlying problem.
For example, just putting in place a proper procedure for dealing with debtors and speeding up payments may help solve the creditor problem. That alone will make life easier..
It was very nice to receive a call from an ecstatic client yesterday to tell me that she had got her debtors under control. The monkey was of her back. The relief and joy in her voice was a reward in itself.
Darwin, where I live, is in the tropics. So we essentially have two seasons only, commonly and somewhat unimaginatively known as the Wet and the Dry. During the Dry we can go for 5 - 6 months without a skerrick of rain, but the weather more than makes up for it during the Wet.
A tropical storm is a wonder to behold, towering thunderheads, incredible lightening. Darwin supposedly has more lightning strikes each year than any other city, anywhere. NASA has even sent special aircraft out to study the phenomenon. But I digress.
As there is no rain during the Dry (obviously) if you have a garden you need to water it. Most of us install automatic reticulation. So the reverse applies during the Wet, and we turn our reticulation off. Bear with me, I'm getting there.
We are billed quarterly. If we were billed monthly I might have picked up the problem earlier. (Hint - that is why you need to look at your accounts and other KPIs on at least a monthly basis.) It was a Wet Season bill, and my bill was more than double what I was expecting. Why was it so?
There were no leaking taps, water spurting or even dripping anywhere, either in the house or in the garden. No lush green patches. Being the Wet the garden was all lush and green. So where was the problem, had how did I find it?
In the end I found it by accident, treading into a very mushy bit of garden. But that was pure luck. I would have found it eventually, by careful examination. And underneath the mushy bit was a split pipe, from whence all the water was leaking. But finding leaks by accident is just not good enough.
And that is the problem you may have in your business. Sometimes the leaking tap is pretty obvious. A particular line, or activity is obviously costing you money. If you can see it, youcan do something about it. But what about the times when you don't know profits are leaking. You don't know until you get the quarterly, or half yearly or, even worse, the annual figures. Because by then it is too late. The profits have leaked.
Sure, you might then plug the leak, but what is gone is gone.
So maybe you need to be a profits leak detective to find out if there is a leak, and to do something about it. Are there aspects of your business which are not doing as well as they should? Hidden leaks. Are you in markets which don't perform as well as others do you could be in? Do you really know your Cost of Sales? If you don't, I'd be willing to bet you are not covering all those costs, and are writing them off against overheads.
The leak could be anywhere.
People emphasise with me how much weight they place on customer service. But there are really two issues here. Lack of both can cause profit leaks. They are front-line customer service and - "How do we enable our staff to provide good service?" Do you have a customer service strategy?
Where should "customer focus" - a customer service culture, start? I would suggest it starts at the top. This is the role of leadership.
In an article some time ago in Business Review Weekly , Professor Paul Rizzo, Dean of Melbourne Business School said, "To achieve sustainable competitive advantage in today's fierce market conditions, companies cannot ignore their customers. Strategy, systems and people must be built around satisfying customers" (my emphasis).
Customer focus starts with choosing markets and competitive strategies which maximise the core competencies of the business - after all, you are more likely to be able to provide good customer service if you are in a market place whose requirements you have the skills to meet. Otherwise your sales could be costing your profits!
It also means selecting customer groups and market segments (for example, strategic, profitable, significant) and finding out what is important to them. Having done that, you might wish to develop value propositions that add value for each of these groups or segments.
You might need to determine not only current customer requirements but also future customer requirements. You might also need to prioritise them. Customers have their own priorities. What is the relative importance of their needs and expectations - from their point of view, not ours?
Does your business understand what it needs to aim for in order to meet customer and market requirements?
It is top management who have the responsibility for ensuring that customer requirements are determined properly in these areas and are met with the aim of having satisfied customers who are loyal. Loyal customers will come back and spend more. Management have the responsibility to ensure that appropriate communication processes are established within the business so that people in the business know how to determine what customers want, how that information is fed to the people who are going to supply the customers and how they react to service they receive.
It is top management who should set in place the systems so that we know whether the business is providing effective and efficient customer service. Irrespective of who actually deals face-to-face with the customer, it is the responsibility of top management to make sure that the business's staff understand what the customers are saying, and that the business is capable of meeting their expectations.
Management sets the framework by determining what the customer expects of the business. This could involve:
Only the other day I was working with a business which was very concerned about lack of cash flow, and so they should have been. The severe cash flow problems were imposing a significant workload on the wife in this husband and wife team. She provided the administrative support for the company, and the whole debacle was causing noticeable stress.
And because so much time was taken up fighting the fires, she couldn't concentrate on improving the business.
Evidence of the cash flow problems could be seen in the accounts. Analysis showed that the current ratio had been declining for some time and was currently 0.93. Short term risk is measured through the exposure of the company to requirements which must be met in the short term (i.e. less than 12 months). Essentially the company had only 93 cents available to pay every dollar of creditors.
So we looked at the average number of days taken for debtors and creditors to be paid. They were not very efficient in collecting debts. Although this is improving 75 days is well outside what would be considered acceptable in most companies.
It was of concern that creditors are paid much more slowly. It took nearly twice as long to pay creditors as to collect debts (75 days to 133 days). This could leave the company vulnerable to action by creditors, although the position is alleviated by the fact that creditors are much less than debtors. It turned out Creditors were funding the Working Capital requirements of the company.
If Debtors were collected properly, the company would have had enough money to pay the creditors. It will take some work to catch up, and more importantly, a proper debtor procedure, but it is fixable. And there will be so much more time to work on the company, less risk, and more importantly, a great reduction in personal stress.
We sometimes have to take the information we have and analyse it to see what is really happening in our business. As my old English teacher used to say "An illuminating glimpse of the obvious."
But to IMPROVE cash flow the increased sales need to be profitable sales.
Sales are not always the answer to increasing profits. In fact sales may be sending you broke.
The pressure is always on to increase sales, right? So you do just that. You put the effort into marketing your business, promoting your products and services. You achieve the increased sales, but somehow there still seem to be cash flow problems.
To both increase and improve cash flow you need to improve the profits from those sales? Do you know whether all sales are profitable?
It’s criminal really. Small business owners know they work hard and that they are good operators in their area of business. Despite this their business is always short of cash and they do not have the time to enjoy some free time with the family, or indulging in those other interests. Because they are always busy, they lack the time to identify the key constraints on them and their business. The cash is just not there. Is lack of profits the result of a crime, or do they have a profit leak, draining the profits they deserve?
As a result they work long hours, seven days a week and rarely have a decent holiday.
Sales are only part of the cash flow solution. Profitability is the key to better cash flow management. Why should you be working so hard if you’re not making reasonable profits and improving your cash position in the bank
Do you feel that your business is not giving you the freedom and the lifestyle you so desperately want? If only you could solve the crime of the leaking profits, the leaks draining cash from your business. If you could, you’d plug them.
And regain control of your business, with the freedom and the lifestyle you went into business for.
Here is a graph from a client we have been working with for some time.
It shows their Sales by month over two years, and their bank balance at the end of each month.
What made the difference? It is not more sales, its more profits; their profitability has more than doubled. And they don't have to be working seven days a week in the business.
So how did this happen? We found the leak! They didn't have to chase more sales, and the weight of more debtors, and customers to service. They just had to find the leak, plug the leak, which they did, with a little bit of assistance from us. No big effort, no dramas. Find the leak, plug the leak, build the profits.
Our newsletter provides regular tips on finding, and plugging the leaks in your business. Subscribe and to help your investigation I'll send you:
Like a water diviner checking for broken pipes, a profit leaks detective needs clues to find the leaks. In fact there are five areas in which you can start looking, just to narrow things down a little. You probably won't be leaking from all of them, but it is likely one or two may be the source of the problem. What you have to do is find the major leaks that are draining profits from your business.
Our newsletter provides on-going tips and clues to help you leak proof your business, as will the free articles you'll find on our site.
Of course we don't know your business as well you do; nobody does and it would be impertinent of us to suggest otherwise. What we do bring is knowledge of particular techniques and principles which can be applied widely to small businesses. I have successfully worked with businesses across a wide range of industries, from tourism to real estate, IT, engineering and manufacturing. And every time I have been able to identify some opportunities for improvement which had a positive impact on the business.
Many years of practical experience in business - hands-on direct management experience running a small business - enables me to bring you a deep understanding of how small business operates and the pressures you face.
And I specialise in working with small businesses because I understand the issues they face, the need to have greater control over their business and to improve their quality of life.
Do I hear you say "How much time will I need to put into this? I'm too busy to improve!" You can multiply the effectiveness of what you do by a factor of 10, given the right tools. For example, we spent only a couple of hours a month with one recent client but over six months they took the business from operating on the limits of their overdraft to having a positive bank balance. And they had more time to do the things they wanted to do plus money to invest elsewhere.
Do you need:
So what should you do? Subscribe to our free newsletter for a start. It's all about creating the profitability and cash flow which will enable you to have the freedom, in time and lifestyle that you want.
A free newsletter which contains tips on these and a whole range of other factors which you can use to help create the profitability you seek.
Access to a range of free articles on improving your business.
Plus "7 Clues to a Profit Leak" - So how do you know that you should be looking for leaks? Are there some clues or symptoms thatare tell-tales saying that a bit of drilling down into your business might pay some dividends? Possible leaks could be anywhere. Of course we are dealing with high level, or first order clues here - clues that say that there ispossibly, or probably a problem which needs investigation.
These clues do not attempt to find the leak,but are more to alert you that there may be some leaks to find and plug. They are symptoms of a possible or potential problem. You will need to dig deeper and look for more specific clues, forensic evidence as a detective might say, to guide you to where you need to take action.
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The Case Study tells you how one business was able to find and plug the leaks and so improve their profitability and free time. Improvements like these are usually much easier to implement than chasing sales or cutting costs.
So that's a good place to start!
A little reassurance - what do our clients say?
He has a calm common sense, no jargon approach to explaining how business works.
Over the last three years Adam has had a huge impact on the way we do business today. He has a calm common sense, no jargon approach to explaining how business works. Some of the valuable points learned were in marketing, proper use of job cards, time keeping, and the successful estimating of jobs to improve our margins to name just a few. We plan to continue our relationship with Adam with further mentoring.
Julie Shugg, Managing Director, AKS Welding and Fabrication Pty. Ltd.
We thought that we knew everything that there was to know about our business.
The Business Overview was a real eye opener for us. We spent a long time deciding to undertake the overview and thought that we were far too busy to set aside the time to actually submit the required information.
We thought that we knew everything that there was to know about our business. How could we not? We spend every day working massive hours. How could someone that knows nothing about IT possibly offer any worthwhile information? All of these perceptions were blown away with the knowledge that the overview provided. The overview offered so much information that we gave it to all of our staff to read.
The Business Overview showed us that whilst we made a profit, other businesses in our industry make a bigger profit with less man hours.
The success of any business today depends on providing a quality service to its customers, the overview helps put us in a better position to achieve the desired result.
Stacey Harris, General Manager
Territory Technology Solutions Pty. Ltd,
It is clear to see that our progression and accomplishments have been developed and nurtured to an extent that could not have otherwise been achieved.
Recognition of Adam's earlier findings and a desire for improvement prompted the re-engagement of Adam for development of a strategic business plan. Adam dissected all aspects of Fluid Power's operations, undertook a customer and staff survey and involved all employees implementing workplace improvements for achievement of strategic goals.
With the development of our strategic business plan some 10 months behind us now, it is clear to see that our progression and accomplishments have been developed and nurtured to an extent that could not have otherwise been achieved. There have been numerous improvements initiated by staff that directly effect processes and working environment and an obvious management ability to plan rather than continue to evolve, including the adoption of a quality system.
Rob Bonney, Director, Fluid Power Darwin
I bet your family would appreciate seeing more of you.
PS As the old saying goes, "sink or swim". You don't have to wait until your business has gone down the gurgler because profits have been draining away. You can find the leaks, and plug them - NOW!
PSS Is there something bugging about this page, something that is just not right, or that (horror) I spelt incorrectly? If so, let me know through this link. And thank you!
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?