10 Ways To Torch Your Small Business Profits

18-September-2012
18-September-2012 13:58
in Practical Small Business Advice
by Colin Smith

Chances are that as a small business owner, you don't have money to burn.  Yet everyday in many small businesses up and down the land, small business owners are losing the battle to keep costs under control as sales grow.  Sometimes the excitement of getting the cheques and seeing money deposited in your business account can lull you into a false sense of security.  Sales success is not business success.  If you focus too much on the top line rather han the bottom line, you'll learn from first hand experience why it is said that profit is sanity whilst turnover is vanity.   If you want to avoid that horrible situation at the end of the financial year when you are sweating on a dividend payment that will never arrive because the money has been spent by the business, here are ten potential problems of which you need to be careful.

1. Shallow Learning Curves 

 As demand takes off, you hire more staff so that you can cope.  That would be exactly what you need if the new employees could arrive at a reasonable level of competence quickly.  What can happen, though, is that some of the new team take ages to train and output falls as your existing team take time out to train them.  In other words, until the new team members are up to speed, you are looking at increased costs but no increase in output.

2. Poor Payers

Many times, landing the big new client can cause just as many problems as they solve.  The established companies have established payment terms of up to 90 days.  When pursuing the big clients, it's important to remember that there will usually be a substantial increase in your outgoings to service this new client before you get paid.  Unless carefully managed, that could even put you out of business or leave you unable to fulfil the contract.  Then, there are your common all garden late payers.  These are simply a fact of modern business life, forever stalling due to perceived (and often imagined) quality issues with your product or service.

3. Out Of Date Systems

Perhaps it's the manual job card system that you use or the basic accounting software, but less effcient systems take longer to use than more streamlined, modern solutions.  This costs time and time costs money.  The choice is then either to live with the inefficiency or pay money to upgrade and take extra time whilst you learn to use the new system.  Either way, it's potential profits up in smoke.

4. Paperwork Getting Left Undone

In the rush to grow the business, you put off some of the administrative work like raising invoices and are not as thorough as you would usually be in costing up new work.  Suddenly, you wake up one morning to a shock, such as having no money to pay a key supplier and on investigation you find your margins have eroded and the money that you have earned is only reaching you months after the completion of the job.  Money left on the table is money wasted.

5. Last Years Pricing

Very few things in business pose a serious an ongoing challenge to profitability as inflation.  Your business costs are invariably rising from one year to the next.  Does your prices do the same?  Regular, fair price increases that reflect the increased costs borne by your business due to inflation are critical to retaining business profitability.  Healthy profit margins of 25% can be completely eroded in as little five years if inflation is allowed to run unchecked by a price increase.  

6. Last Minute Purchasing

Purchase planning can make all the difference to the profitabilty of your business.  Last minute purchases are usually bought at a premium to reflect the extra value of their convenience.  Consistently paying retail rather than wholesale prices will without question serious harm your business profitability.  

7. Weak Morale

The Gallup Organisation have done some great work on the cost of low morale for business.  They have estimated that there are 22 million actively disengaged employees currently costing the US economy as much as $350 Billion each year in lost productivity, including absenteeism, illness and other problems that result when employees are unhappy at work.  What's the cost of poor morale in your small business?

8. Bringing Problems Into the Workplace

 Ever had one of those times when everything seems to be falling apart in your personal life?  What has it done to your productivity at work?  This is doubly damaging when the small business owner is out of sorts as they set the tone for the entire organisation.  Although it's easier said than done, if you can leave your problems at home and bring a high level of professionalism to the workplace, your bank manager will thank you for it.

9. Overpromising

All of us do it.  A customer places a huge order and wants a million whistles and bells that we do not normally provide.  Of course, we agree in an attempt to keep them happy and then lose money and reputation trying to deliver the impossible.  We all saw this happen in spectacular fashion with G4S at the recent London Olympics. 

10. Underdelivering

In the anxiety to drive the top line numbers ever higher, you take on more work than you can comfortably handle.  Work quality inevitably suffers, mistakes get made and soon you reputation and customers begin to slip away.   

 The challenges of growing a business profitably are not all bad news. You simply have to be alert to the fact that unless you are investing time and money into people, plant and processes before taking on the extra business, it might be a bit hairy for a while.  This is a fact of life for most entrepreneurs who generally fight for the business sometimes unsure of exactly how they are going to fulfil the contract and then invest in the businesses capacity after the money starts coming in.  If retaining profitability is a challenge for you and your small business, remember that Continuous Business Planning are an affordable resource to help you get where you need to go.  With our 500% return on investment promise, engaging our services might be the most profitable decision your company will make this year. 

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