Conducting a Waste Audit for Profitable Growth

Most business owners look at profitability as a one-way street, as a simple equation where more revenue equals more profitability. While there’s some truth to that, there’s much more to consider.

As business advisors and CPAs, at Haskell & White we spend our time buried in profit and loss statements. We’ve found that often, the key to increasing profitability is more about decreasing waste than it is about top-line growth.

Stick with me on this one. There’s merit to increasing revenue. It’s the most straightforward way to drive growth. More cash flow at the top trickles down and creates more money at the bottom. However, to create profitable growth, it’s essential to look at the entire picture, not just the incoming revenue.

Profitable Growth vs. Top-Line Growth

Many business owners do a great job at landing new clients. Their lead generation pipeline is solid, and their sales teams are talented. But, every dollar of revenue a company earns has to make its way through the income statement. You have to buy equipment, pay employees, purchase inventory, and more.

The result? More revenue creates more work for the business, and it doesn’t often result in much money in the business owner’s pocket. This is where the difference lies: Top-line growth puts an emphasis on increasing revenue. Profitable growth focuses on margins, decreasing waste, and creating sustainable long-term growth.

Both are important. But, as business advisors, we see our clients consistently losing thousands of dollars due to unnecessary waste. This disconnect is why we advise all our clients who are looking to increase profitability to start with a waste audit.

What Constitutes Waste?

A waste audit involves looking at your company’s profit and loss statement and finding areas where you’re spending more money than necessary. First, let’s talk about waste.

What constitutes waste? As business advisors (in addition to our assurance and tax planning services), we like to use Toyota’s eight most prevalent wastes as a guideline. Though originally developed for Toyota’s production system, we’ve found that these types of waste apply to almost every business.

You simply need to remember the acronym DOWNTIME, which represents the following:

  • Defects – Ranging from poor equipment quality to inadequate training, this applies to essentially any defect in your system that results in having to scrap or re-do work.
  • Overproduction – Situations where you have too much product or are spending too much time on low-paying clients. Paying too much overtime also falls into this category.
  • Waiting – Essentially, the money lost due to waiting: waiting on client responses, credit approvals, or simply being unable to finish tasks in a timely manner.
  • UNused Talent – Improper task delegation or not utilizing your employees’ talents appropriately.
  • Transportation – Transportation costs like freight, travel, company vehicle usage costs, and transportation to meetings, or even paying for overnight shipping when standard shipping would suffice.
  • Inventory – Having too much product on hand, too many SKUs, outdated products, or continuing to buy products that aren’t selling. Packaging costs and write-offs also apply.
  • Motion – Related to efficiency in movement and how your systems affect that efficiency—including your office layout, the location of your tools, required travel, and more. Think about the daily processes and how habitual motions detract from the bottom dollar.
  • Extra Processing – Using unnecessary resources: the wrong tools, the wrong people for the job, or too many people working on the same project. This can also include paper waste or excessive documentation.

Each company’s application of these eight wastes varies dramatically. If you’re a manufacturing company, defects are typically associated with equipment. If you’re a retailer, defects may be associated with bad products. Whatever your industry, it’s simple to apply these eight areas of waste to your organization and begin seeing where you might be hemorrhaging potential profit.

There’s a lot more to get into, which is why I’ll be dedicating another article sharing a case study of a successful waste audit and my recommendations for simplifying your first waste audit to start seeing results faster. If your curiosity is piqued and you’re interested in learning more about how we can support your company’s efforts at profitable growth, feel free to get in touch for a complimentary consultation.