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?