Plugging the Leaks
Andrew and Julie had a problem!
Andrew is a tradesman, a boiler maker, and a good one at that. So a few years ago he did what many people who are good at their profession do, went into business for himself.
They worked hard, and the business had a good name. The problem was that they weren’t making any money. Things were tough, and getting a little tense.
Before Profit Leak Diagnosis and Action
- Suppliers were pressuring them and they had used up their overdraft.
- Some jobs made them money but many jobs were losing them money, despite their hard work. And the problem was they didn’t know which was which.
- The actual result achieved one job may be up to +/- 34% of the price quoted.
After Profit Leak Diagnosis and Action
- Pressure gone
- Spare cash in the bank
- Able to pat creditors on time
- Only taking on jobs that make money
- Jobs come in on budget
- People pay in full and on time
Read on to discover if your business can turn things around like Andrew did
The Story
Andrew is a tradesman, a boiler maker, and a good one at that. So a few years ago he did what many people who are good at their profession do, went into business for himself.
And because he was good at what he did he grew from operating from the back of a truck, to leased premises and ultimately his own facilities. He started to employ staff as well, other tradesmen who also could do the job well.
His wife, Julie came in part time to help with the accounts.
Customers liked the work they did. Typically they would say:
- If our need is urgent he will drop everything. That is why we use AKS. Where we have had to tender Andrew has not always been the cheapest but we have used him for these reasons
- Good quality, give a lead time of a week and within 4-5 days the job will be ready to be picked up.
- They are pretty responsive.
- We like the friendliness and performance of their people. They are approachable.
- If we ever have a complaint, they are very receptive and make sure we are happy. Their customer service level is above the norm. They perform at short notice.
So what was the problem?
They worked hard, and the business had a good name. The problem was that they weren’t making any money. Suppliers were pressuring them and they had used up their overdraft. Things were tough, and getting a little tense. Could we help?
Help we could, but first we had to find the leaks, or leaks, which were draining the profits from the business.
It didn’t take much to find that overheads were not the problem.
Like most small businesses Andrew and Julie ran a pretty lean business. Their own salaries were reasonable, but not extravagant. There was only one person other than Julie in the office, and she looked after the front counter. Everyone else is direct employee, do the welding and fabricating on orders.
Getting sales was not a problem.
There was plenty of work around. Word of mouth was pretty effective in promoting the business.
So it was worth looking at the actual jobs themselves and the margins being achieved.
Now each job was accompanied by a Job Card which recorded the materials used, any sub-contracts, and hours spent on that job. At the end of each job the profit would be assessed and the card filed. AND THAT IS ALL THEY WOULD DO! But at least there was some data with which to work.
For a start we took a sample of 29 jobs and put them into a spread sheet. Details recorded included the materials, sub-contract and hours estimated for the job, and those actually achieved. We were able to compare the profit they thought they were going to make, and the profit actually made. So what did we find?
Well, it was rather confusing at first?
Many of the jobs made much more money than expected, but many also lost money.
1. Actual Profit less that Theoretical Profit - 9 jobs
2. Actual Profit more that Theoretical Profit - 20 jobs
Did that matter?
When we added the profit we found
3. Total Actual profit = $9,485.44
4. Total Theoretical Profit = $11,484.24 .
Although twice as many jobs earned more than Theoretical Profit, jobs that were less well done cost the company more. But the two totals are not that far out, so overall they just about balance out. Surely that’s not a bad result, or is it? What if this result was just a coincidence?
So how consistent is the variation?
Could we say that jobs will be completed within a reasonable +/-% of quotation. No we could not! The average price variation from the quoted price is - 4% (i.e. of the 29 jobs analysed the cost plus profit is 96% of the quoted price). While this might sound reasonable the standard deviation about the average is the key figure. This is 34%, i.e. the actual result achieved may be up to +/- 34% of the price quoted.
Why was it so?
And what could we do about it? That was not so clear. Was it the client, or the type of job being done? In short, the answer was no. There was no correlation between the results and the company commissioning the work, or between the results and the type of job being done. Now I had fully expected to find the answer here, so this was a b it of a blow.
What to do?
After scratching our heads and being suitably perplexed we thought we would put Andrew under the spotlight and see if he could tell us anything about the jobs.
We decided to concentrate on those jobs where the variation was significant, either above or below the planned profit.
Now Andrew, like any good tradesman, could remember extremely well the various jobs that had gone through the workshop. “Andrew, what can you tell us about this job?” “And what about that one?” and so on.
The answer emerged just like that. It was the characteristics of the job they were asked to do that was the key. And not surprisingly the jobs that were very profitable for AKS were the mirror image of the ones which were unprofitable. They had the key characteristic and unprofitable jobs didn’t.
So there’s the answer
It was simple. Accept those jobs which had this particular characteristic. If these characteristics were not evident in the potential job it should either be declined, or a large ‘contingency’ added to cover those costs which couldn’t be identified but that which experience showed.
Andrew and Julie have not even got to market their business capability, work is finding them.
Let me show you the results again.
It shows their Sales by month over two years, and their bank balance at the end of each month.
When we look into their figures in more depth we can see what is happening. The number of jobs showing an Actual Profit less than the Theoretical Profit has been continually declining. In other words, when AKS accepts a job with the right characteristics it is likely to earn a greater than expected profit. And this has gradually fed into their bank, eliminating the Overdraft and then building up their bank balance.
What can we learn from this!
Firstly – there can be no change without desire for change. If Andrew and Julie had not wanted to change the situation they were in, to plug the profit leaks, they would still be where they were, or more likely, out of business.
Secondly – making good decisions requires good information, and analysing and using it. Andrew and Julie had information (Job Cards) but they hadn’t analysed it. Making decisions on gut feeling and instincts is all very well, but you are far less likely to make the right decisions. Facts are better than dreams.
Thirdly – the answers are not always obvious, at least, not immediately so. You need to be persistent.
Fourthly – your sales can cost you profits. Seeking a sale, any sale is not the solution even when times are tough. Only seek and accept sales which are likely to increase your profitability.
And what was the key characteristic of good jobs that was not present in bad jobs? Well, we’ll leave that to Julie and Andrew. The profit leak in your business is likely to be different.
If you want help with plugging your Profit Leaks click here
Adam Gordon
Profits Leak Detective
