Finding Hidden Profits
Are you maximizing your business’ profit potential? Here are some common ways businesses miss out — and how to fix them
On the surface, business is guided by some fairly simple principles. You produce a product or service at a cost, and sell that product or service at a markup that is sufficiently large enough to turn a profit without pricing you out of your target market.
But underneath that Economics 101 definition is a host of other factors that invariably come into play when managing a business made up of numerous moving parts. And if you’re in growth mode, you’re likely adding parts every year.
If those factors aren’t managed correctly, you could be leaving money on the table. Those who consult businesses on lean and efficient practices call it hidden profits, and it is made up of the sum total of money lost when items aren’t priced correctly and wasteful practices lead to unnecessary financial drain.
“Broadly, we can define hidden profits as any opportunity where your profit potential isn’t being maximized,” says Steve Wilkinghoff, the Calgary-based author of “Found Money: Simple Strategies to Uncover the Hidden Profit and Cash Flow in Your Business.” “For example, if you have a whole bunch of customers, you might have a decent rate of average profitability, but when you segment your customers, you might find that certain types of customers are making you far less money than other types of customers, and you might need to take a look at why that is.”
Ultimately, it comes down to the efficiency and effectiveness of your business practices, and often, that means streamlining your practices so they’re easy to understand and control.
“I’ve owned 11 companies in my career, and, for me, simplicity has always been the key,” says Troy Hazard, a Florida-based entrepreneur and author whose latest book is “Future-Proofing Your Business: Real-Life Strategies to Prepare Your Business for Tomorrow, Today.” “How can you always be looking to make your business more efficient and effective?”
The task of maximizing your profits is a large-scale one that requires constant vigilance. But it’s also rooted in common-sense principles that are central to good business.
Look at the numbers
Profit and loss statements can tell you a lot, but they really only tell a part of the story when it comes to your company’s money. Gross profit numbers are aggregate numbers, and they don’t tell you where your profits are strong and where they’re weak. The areas where your margins are weak are the ones where you could be losing out on the chance to maximize profits.
“Lots of business owners look at their profit and loss statements and see a gross profit of 40 percent,” Wilkinghoff says. “But they might not realize that percent is just an aggregate number. Some products might make 20 percent, some might make 70 or 80 percent, and it doesn’t always correlate to sales volume.”
Some of your best-selling products may be yielding the thinnest profit margins. If that’s the case, you may have made an error in pricing to the market, or internal inefficiencies are leading to cost overruns in the process of bringing the product to market. Analyzing every step of the process for needless steps or poorly defined steps and redundancies can help you eradicate waste. In addition, compare your prices to those of the competition. You want to price competitively, and below the competition, when possible, but not so far below that it’s eating into your margins.
“Know the value of what you offer,” says Jonathan Smith, head of the Washington, D.C.-based business strategy firm ChiefOptimizer. “For example, your pricing on a service might be 10 percent below the market, but the quality of the service dictates you should be about 20 percent above the market. Know what you are offering and how it stacks up to what’s out there in the marketplace.”
Maximize selling opportunities
Many products and services lend themselves to add-on sales opportunities. If you don’t offer those add-ons, or your sales staff doesn’t do an effective job of selling them, you’re missing out on one of the most basic forms of profit maximization.
The little things add up. If you run a manufacturing company, you can sell a service agreement on a big-ticket product, which is a time-tested way to increase profits without much committed in the way of resources or manpower. However, if you bundle multiple services as part of the plan and charge a nominal but mandatory convenience fee for the bundling, it’s additional money attached to each sale.
“In manufacturing companies, for example, a service contract sold on the back end of the purchase can help drive revenue,” Wilkinghoff says. “But I’ve also worked with a printing company that packaged certain services along with their products and sold them to clients. I proposed a slight shift — bundle the services, but charge a $5 convenience fee to the package as an add-on. It seems like a little thing, a small amount of money, but it was small enough that the customers didn’t complain. You multiply that $5 fee over thousands of customers, and it’s a big profit point.”
You can also find additional sales opportunities by understanding the pain points of your customers. If your company can solve problems, you’ll develop a loyal customer base of grateful clients who view money spent with your company as money spent wisely. And loyal customers equal repeat customers, which not only means increased profits but increased profits on a steady basis moving forward, as those clients funnel regular business through your door.
“You have to be willing to step back and take a look at the whole picture of where your business stands and where you have the strongest relationships with customers,” Smith says. “You have to think beyond the sales contract that is sitting in front of your face to how you can develop relationships with customers and leverage those relationships to drive profits.”
Eliminate wasteful practices
Wasteful practices are one of the biggest profit swallowers in any type of business. If processes contain too many steps that delay results, if there are tasks that don’t fall under anyone’s job description and are subsequently piecemealed out, those things can affect your efficiency and, by extension, your bottom line.
Accounts receivable is one area that demands efficient operations and accountability, or you almost certainly will find yourself losing dollars. If you are able to sell add-on services, or find other ways to use additional services and options as a means of driving revenue, it doesn’t mean as much to your financial standing if that money fails to arrive in your office in a timely fashion.
“That’s one of the main questions you can be asking yourself — how many days out are your accounts receivable?” Smith says. “And are you collecting in a timely fashion?”
Good organization can cure a lot of problems in your accounts receivable process. Define roles in your accounts receivable department, including who is in charge of follow-up calls on delinquent payments, and how many days you are giving customers to send the check.
Keep track of all of your accounts receivable data in a single location. Smaller businesses might be able to keep track of everything with a basic spreadsheet. As businesses grow, however, the need arises for more sophisticated software built specifically for managing receivables.
There are many other areas to address with an eye toward eliminating waste and making your business leaner. Do you have the right amount of salary committed to the right areas? Sometimes eliminating positions isn’t the only way to cut costs. An employee, or group of employees, might be performing tasks that should be categorized under another department, which can take overhead away from an underperforming department and place it in a department that is better suited to operate with the additional overhead.
“I’ve seen homebuilders hire warranty people and treat that as project overhead, but is that really overhead?” Wilkinghoff says. “Should that be allocated to another part of the business? Those are the types of questions I like to bring up.”
In addition, be reluctant to take on additional overhead costs. You might think you are careful with regard to adding overhead costs, but it’s very easy to spend money when you have a good month or quarter.
“A lot of business owners treat extra overhead almost like a reward for themselves,” Wilkinghoff says. “You have a good month, come in over sales projections, and you hire an assistant, or add on to the office. That’s great, until you have a bad month and still have to pay those bills. When you spend your money, make sure it’s on a valid need. Otherwise, it’s more wasteful spending that’s eating into your profit margin.”
Wasteful practices equate to dollars tied up in resources, dollars that could otherwise be added to your bottom line. It’s not just about making money, it’s about how you spend it.
Don’t get caught up in the drama
Every company leader has to have the ability to pull back and look for undeveloped lines of business and ways to improve internal efficiency. But you’ll never be able to take those profit-maximizing steps if you’re working in the business instead of on it.
Hazard calls it “getting caught in the drama.” If you feel the need to involve yourself in every email, phone call and general distraction that you encounter, you’re not leading in a way that’s going to allow you to find the unexplored areas that could boost your profits.
“Those distractions can prevent you from analyzing what’s ahead,” Hazard says. “You should be looking at leading indicators and reacting to those in a way that allows you to maximize your profits. But many business owners don’t take that time. They get caught up in the day-to-day stuff and end up looking at lagging indicators of sales and financial performance.”
He says that, by then, it’s too late.
“All you can do then is look back at the end of the month, quarter or year, and see how much money you wasted,” he says.
Hazard recommends setting goals — on a daily basis, if necessary — to ensure that you maintain the proper outlook with regard to profits and performance, and don’t get bogged down in things that should be delegated.
“In my own businesses, I’ll take stock every morning,” he says. “I’ll look at what I accomplished yesterday and what I can get done today. I look at what I can do to maximize efficiency and continually improve the performance of the business.”
Hazard divides the items on his desk into three buckets: the things he can change today, the things he’s involved with but can’t change today and the things that he can’t change or that should not be on his desk.
“It’s about what you can do to be effective today,” he says. “If you’ve sent out a proposal but can’t take any action on it for a couple of days, make a note not to think about it for that timespan. Beyond that, if you can’t influence something at all, it’s simply taking up space in your head. If you didn’t register to vote, don’t watch the polls. It’s the same principle in business.”
It’s as much a matter of culture as it is a matter of dollars and cents: An efficient CEO tends to run an efficient business that maximizes its money-making opportunities by capitalizing on business opportunities and eliminating wasteful practices.
“There is a correlation between the effectiveness of the person in charge and the effectiveness of the business,” Hazard says. “Efficiency and effectiveness help cash flow, and that’s key if you have plans to grow. Simplicity, in general, leads to more profitability. If you make your job simpler, you can make it easier for your business to make money.”