I come across businesses like this all the time – you might even be one of them.
Is your business bringing in lots of sales but not making much profit? You may have leaky bucket syndrome, a common ailment in many businesses.
This parable will explain further:
Celeb lives in a small village on the Amhara regions of Ethiopia with his wife and two small children. They live in a small thatch house and he is the proud owner of a beautifully hand crafted wooden bucket. Now this village does not have any running water so Celeb must get up at 3am every morning to make a four hour journey to collect water from the river using his wooden bucket.
Celeb is very careful carrying the full bucket back home and always takes the best track so spillage is minimal. But even after all this, the bucket always has less than he was expecting. However what he discovers on careful inspection is that his bucket is leaking where the slats of wood join the bucket together - and these gaps are widening, making the leaks progressively bigger.
He now has a dilemma. Does he keep going carrying water and getting less return, or does he go to the cooper in the next village and get his bucket fixed - which will cost him three days travel to another village, and one months wages to fix the bucket. The portion of water left each day is dwindling and if this continues, eventually there will be no water left for his family anyway.
Celeb comes to the conclusion that he must make the 3 day trip to the cooper and get his bucket fixed. So he takes the trip and on arrival the cooper, a master craftsman, painstakingly takes the bucket apart piece by piece, shaves the individual wood pieces until they fit neatly together again, binds them back together again with metal bands and then soaks the new bindings and the wooden bucket until the wood swells to the point that there are no more leaks. The bucket is as good as new.
Celeb travels back to his village and prospers with his repaired bucket. He accumulates extra water and trades the extra for money to buy another bigger bucket. All is well again for Celeb and his family.
A nice happy ending. Now, let’s put this in the context of your business.
Imagine that the bucket is your business, the water you carry in the bucket is the money flowing into your business, leaks are expenses and unnecessary costs in your business.
How much water do you have in your bucket, and where are the leaks? After answering this question you now have some choices to make - carry on as you are, or fix the leaks.
As a business coach I know that every business has leaks but often the owners can’t see them so they lose a lot of hard-earned-profit unnecessarily. I have seen companies who had increased their business by as much as 200–300% and had hardly increased their profit at all. What they have now is a monster of a business that gives them more problems in exchange for taking even more of their time and energy - which is a terrible deal.
One of the easiest ways to increase profit is to just to stop the leaks, but I find very few think about this part of their business much, let alone take the action to fix it.
So where do you start? Let’s take a look at some your biggest costs and work on them. A good rule of thumb when looking for leaks is to hunt out the big ones. Here is a list of the most common ones most business have:
Increase your prices in every area you can. Even a 5% increase is significant as it will go straight to your profit. For example if you have $1,000,000 sales, a 5% increase will give you another $50,000 profit. Not bad for a little tweaking (and your customers in most cases won't even notice).
This will be your biggest cost and will require the most attention. Take a look at your largest suppliers and list the most significant products/services you buy from them. Write down their costs and then contact other suppliers for similar products to get a comparison. You will find that in some areas other suppliers will be cheaper. Now start negotiating!
Here is a list of some expenses also worth looking at; this is just an initial list; in your business there will be others:
Make sure that you are on the right rate. If you don’t specify the correct rate for your business, you will probably be on a default rate which could be higher.
There is a very famous quote by John Wanamaker, a very successful retailer: “Half the money I spend on advertising is wasted, but I could never figure out which half”. Test and measure every dollar you spend on advertising or promotions. Then do more of the stuff that’s working and drop the others. You will spend less and make a lot more sales.
Check with your bank that you are on a competitive rate for your level of business. Many businesses I come across have rates from years ago that are no longer relevant to their business today so they are paying higher rates on transactions than they need to.
These will vary greatly depending on which company you are dealing with. For example in a previous business I used to send 20kg boxes around New Zealand - depending on which freight company I dealt with, the delivered price ranged from $4.60 to $21.00 per carton.
Most businesses get a staff member or book-keeper to work out the GST. Make sure whoever is doing the returns knows what they can claim and what they can’t. Ask your Accountant if you are not sure and then check the GST return before paying. Often businesses are not claiming everything they should, and are paying way too much. Amounts I discovered were being overpaid overpaid by previous clients include $35,144.00 and $8,007.00 - yes these are real figures of GST claimed back - so don’t assume you have it right without checking.
Nearly every business in New Zealand has had an increase in insurance costs since the earthquakes, however it’s still worth looking into. Check into the excesses on your policies, a significant amount of costs for insurance companies is in paying lots of small amounts, so if you increase the excess you will have good reductions. Again shop around and get a comparison, you might be surprised what you can save.
Check out current interest rates on your mortgages and loans to make sure you are on a competitive rate. If you have long term debt, take a look at what fixed options are available.
Most businesses have times of the month where they have money in the bank until accounts are paid. Put these funds in an interest bearing account or even better have a flexible portion of your business mortgage where funds can be transferred temporarily so you are not paying any unnecessary interest.
Internet and Phone
This is becoming a very competitive industry with plenty of options. Check what deals you are on and if they are still the best for your company. Especially with mobile there are plenty of plans out there and it can be complicated to work out the best deal. Take a typical month and then get your current provider to check if you are on the best plan. It’s also a good idea to show other providers a typical month and see what they can offer for comparison.
Skype and other internet based providers are also worth looking into, as sometimes these can be free for national and International calls.
Make sure all your taxes are up to date, and if they are not, get hold of IRD immediately and make an arrangement. If you don’t, you will be charged late payment and filing fees and interest. Left long enough this can mount up – in some cases I have seen these extras being more than the original taxes owed – not cool! Don't pay more tax than you have to.
It’s always best to have good staff and pay them well, however double check if you are getting value and have the right staff at the right times. Make sure that you are not paying for extra staff during down times. For example a cafe client I coached found that staff were taking too long at the end of each day cleaning up. Just by making it clear that staff needed to start earlier to clean up so that they were out by 3.30pm saved them another 10-15 hours per week which over a year was significant for them.
Bonus Tip 1:
Talk with your staff about areas you could save costs; there are a lot of hidden costs that they will see that you may not. This could be anything from excessive waste or dead stock through to more efficiency in areas of your business, through to better customer service.
Bonus Tip 2:
I often find that businesses I work with have not negotiated with their suppliers for years and are buying much more than when they originally started. They might be buying 2-5 times more than when they first dealt with that supplier but are still on initial rates. Remember the bigger the volume, the more negotiating power you have. A big account in most cases will get a better deal than a smaller one. Most suppliers will give a better discount for their larger customers but not often without being asked. So start asking.
1) Go through all of the leaks and aim to reduce each of them by 5-10%
2) Take out your Financials and see what other costs not listed here can be reduced
3) Repeat this at least once a year