Where profits may be leaking from your business
Your business can be viewed as a kind of bucket. In the top you pour revenue, which comes from your marketing, sales and production efforts, then deduct the direct and indirect costs of producing that revenue. Unfortunately everyone’s bucket leaks and so the amount left over (as net profits) is often a lot less than it could be and what is required to balance the effort and risk that you assume as the business owner. It leaks out through holes such as: too many overheads, insufficient margin, working with the wrong clients, burning hours on fixed price contracts and a number of other ways.
Over the next few articles I will be looking at some of these leaks and what you could do to minimise or eliminate them. The aim is to help you improve your profits and free cash in your business. Plugging leaks in your business processes is perhaps less sexy than implementing a new marketing plan, but stamping on the accelerator when your business engine is not properly tuned will result in more waste and the money leaking out of your business even faster.
Of these leaks, possibly burning up extra hours on fixed price contracts is the biggest silent killer of profits. Often this is not measured by owners and so it goes undetected until after the final wash-up is done and you realise that there was a lot less profit in the job than you thought, or maybe even a loss.
So what can you do about it to minimise or even eliminate this potentially fatal disease in your business? There are many areas to tweak in the business that will help in this area. Here is my top 5:
Hire better.
This comes under the category of avoid the problem before it starts. By choosing employees or sub-contractors better, checking on references, hiring on a trial basis only to start and paying top $ for quality, you may avoid many of the headaches before they occur.
Meet regularly.
Hold daily site meetings by you or your field supervisors to clearly set out what is to be done and match the best person for particular jobs. Don’t just assume people know what to do. If necessary have some written procedures to follow.
Measure regularly.
By tracking allocated hours to a particular task versus actual hours expended on that task, you can keep a running tally of whether you are falling behind on your labour budget. This should be done weekly, or at logical milestones in the build process. It is a lot easier to make small adjustments to the labour equation, rather than waiting too long and not have enough time to get back on course.
Training.
Don’t be afraid to invest in training your staff, or even your subbies to a point. I know they may leave and take those skills with them, but what is worse, train them and they may leave, or NOT train them and they STAY!
Pay for results.
Link the quality of work (or the lack of it) to what you pay. If people you are paying make an unacceptable level of mistakes and you have to spend extra to fix it up, then consider deducting the extra hours (or some of them) from what you pay them. This needs to be set out clearly at the start and you need to be fair and allow for some errors to occur. You may also balance this with an incentive scheme for getting through the work faster than budget.
Another area where labour hours are “lost” on a job is through variations that are not documented and billed to the client on a timely basis. This will be the specific focus of a later article in this series, so keep an eye out for that.
If you feel that you have an issue with unacceptable levels of mistakes or just slow team members, I suggest to put some (or all) of these strategies in place and just watch that bottom line profit grow! For help in identifying where profit is leaking from your business and what to do about it, contact me HERE or email me direct HERE.
You may also want to download a copy of my Profit Leakage Analysis checklist HERE