12 Most Costly Profit Killers in Your Small Business
If your business strategy focuses solely on growing your business by expanding top-line revenues, take a closer look at your profit margins to ensure that your fair share of profits are actually reaching the bottom line. In many cases, you’re so busy selling, delivering, and putting out fires, your costs can silently creep out of control, with damaging effects on your business profits.
Here are 12 costly profit killers that can drain your profits faster than you ever thought possible. Manage them closely to boost your bottom line.
1. Excess space
When you look around and see unused space that month-after-month you’re paying a high price per square foot, this can be a real profit drain over the long term if you are not predicting business growth. How do your clients directly benefit from the space?
If the excess space can be isolated, there are a few possible short-term and long-term options to consider. Subletting it to a non-disruptive tenant, creating a meeting room for rent, or offering the space back to the landlord are just a few ideas that can be incorporated into your strategic space plan. If you are in need of extra space, use care to explore temporary space options before committing to fixed cost space expenses. Think long-term strategy while managing short-term expenses and delivering exceptional customer value.
2. Underutilized equipment
Same as in item #1, when you carry underutilized equipment in your business, you’re paying for it 24/7 even as it sits idle. Perhaps a big one-time order came in but did not lead to a steady stream of orders as expected. Maybe it is a seasonal lull. Perhaps that line of business has slacked off. No matter the reason, look for creative opportunities to mobilize the underutilized equipment to process orders for other products or even other companies, rent it out for a second shift, or trade it in to offset the on-going cost burden of this equipment on your bottom line. If you need new equipment, run the numbers to ensure a high percentage of utilization before you sign. For example, if you have proven orders to reach 70% capacity within your planning horizon, and more beyond that, it is a good bet.
3. Excess work-in-process
Every business has a flow of work that moves from beginning to completion before earning full payment, adding costs all along the way. Work that is 90% complete has accumulated a large quantity of costs yet cannot be converted to revenue until it is complete and passes quality inspection. Work-in-process applies equally to manufacturing as well as to providers of professional services. Take a look at your projects that are more than 90% complete and expedite getting them out the door. Then take a look at your core business processes to identify and remediate any bottlenecks to permanently reduce excess work-in-process and increase your business success. Check on these stats every month.
4. Management time on trivial matters
Every hour of every work day brings on the question: What is the best use of my time right now? Small business owners struggle constantly with doing everything because in their view, they can do it better and faster. That is often true in the short run, but a real profit killer in the long run. Value your time at its highest use anywhere from $50-$300 per hour. Then rethink whether the task needs to be done at all, and by whom. Consider who else can pick this up and run with it under your supervision. Delegate: this is strategic productivity in action.
5. Time thrashing or multitasking
The sad fact is that you’re probably not as good at multitasking as you think you are. And I’m not even referring to texting while driving. Scores of scientific studies revealed that the brain works on one thing at a time and quickly moves from item to item as needed; it does not multitask. You’re actually wasting time to reset your brain each time. So work in profit slots of 20 minutes or so to focus solely on a single activity. Strategic profit slots can be 90 minutes or more of focused time and attention to boost long-term productivity and profits — and to stimulate creativity and innovation.
6. Excess inventory
Whether you’re in retail, publishing, manufacturing, or even consulting and professional services, having excess inventory and idle resources is a drain on your bottom line. Plan ahead for the next two quarters and see what you actually need to keep on hand. Then explore viable ways to redirect resources you don’t need when carrying costs are too high. Business trends might be seasonal or short-term, or else they could be flashing a major change in direction. Be out in front to proactively manage your inventory levels and staff time to boost your profits.
7. Excess vehicle costs
Whether it is too many cars or trucks or a simple mismatch with your needs, take a close look at your vehicle fleet, contract terms, operating costs, fuel prices, and business practices to better align with your business needs going forward. In cases of long-term agreements, it’s often cost prohibitive to make any midstream changes. But there are changes you can make. Are you being too generous with company cars? Can you charge more for delivery or be more efficient? What can you do this month to bring down excess vehicle costs?
Some rework is inevitable if there are new processes, equipment, materials, or staff involved; a learning curve is at work. But over time in stable business processes, quality should be going up and defects going down as you master the art and science of production and delivery. Explore cases where rework was needed and seek out the source. Perhaps it was a customer change order, calibration error, communication breakdown, or material variance. Each has a different solution. There is a direct relationship — when rework goes down, profits go up.
9. Printing costs
If your business is like most small businesses, there is far too much in-house printing going on. Printing large documents from front to back with many extra copies, printing entire drafts over and over, and printing all pages in color is expensive. There are many ways to cut down on toner, paper, and maintenance expenses when staff print only what they need, when they need it. And for off-site printing, simplify the design where possible — seek out at least three bids and avoid rush jobs like the plague.
One look at your monthly income statement and you’ll notice the charges: electric, gas, water, trash, and more. What steps can you take to manage high heating, cooling, and lighting costs? Some states offer generous financial incentives to install energy-efficient equipment that will save you money year after year. Check for leaks in excess water usage. Look for ways to reduce, recycle, and reuse. Review production processes that could be streamlined. Even waste heat can be a revenue source. Take one area at a time or do a comprehensive utility review to reduce the drain of these profit killers.
11. Incomplete in-take processes
Many companies, associations, and professional service providers require a substantial amount of data to be collected in their customer, client, and patient in-intake and application processes before any services are rendered. Often there are critical gaps in needed information that take extra time to complete. Medical offices, banks, financial planners, management consultants, associations, membership clubs, and others are saving time, increasing completeness and accuracy, and boosting profits by moving toward client entry of key data into smart forms in advance, before they even set foot in your office. What steps can you take to streamline your in-take and application processes? Note any redundancies and inconsistencies and take action to cut costs and time to improve accuracy and completeness.
12. Product returns
Having physical products come back on site is expensive. Everything you can do to remedy the situation should be explored. Electronics come with restocking fees to ensure a good fit before purchase. Custom work generally cannot be returned, so clear specs and acceptance criteria are important. Look for trends in returns in your business for key insights related to products and customers that lead to a return. Explore your product information, training and business processes to reduce your team’s role in returns. Speak with your customers. Offer an 800 number to offer set-up guidance to rectify common bottlenecks your customers encounter.
If you‘re experiencing even one of these 12 profit killers, it is already negatively affecting your bottom line. Many businesses are facing more than one. The faster you plug your profit leaks, the more rewards you will reap. Get the data you need to get to the root of the problem — many issues have several contributing factors and interconnections. Once a profit leak is successfully plugged through strategic cost-cutting, you’ll see dramatic changes in your bottom line. And better yet, the savings become an annuity that builds your bottom line well into the future.
Where are you going to look first for profit killers in your business?
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