Profit Leaks – how businesses can lose money

Woman writing numbers on clear screenThere are many ways in which businesses ‘leak’ profits. These leaks are the little (unnoticed) holes in systems or processes that can lose you money. Plugging these leaks often requires little extra effort but can have a substantial effect on your bottom line.

Often a company will start out fairly watertight but as it grows, more people become involved in processes, it’s more complex and the leaks develop.

Let’s look at a few examples. Below are three case studies, my own experience in different types and sizes of company.

1.    Information deficit leaks – do you know which of your products and customers are the most profitable?

Profits may be lost or not optimized where a company does not have the information needed to assess the best business strategy.

A well run service company had not increased its turnover in a number of years. The owners knew what the sales were for each service area. What they didn’t know was how much each sale cost, that is, how profitable each area was.

Once I’d implemented a project to analyse those costs the owners could determine which (most profitable) services to expand. Over the next few years income and profits increased by 65%.

2.       Revenue leaks – is every sale invoiced?

A company manufacturing units for onward processing used a sophisticated computerised system which managed stock, production through to delivery and sales invoicing. Even the smallest stock items were bar coded and recorded as they were used. When finished the units were scanned out of the factory. On delivery to the (one main) customer the units were scanned again and a sales invoice automatically raised on the system.

All computerised – so nothing could go astray? You’ve probably spotted the flaw. Some units ‘missed’ scanning at the customer. No sales invoice was raised and of course no payment received.

Most people will have assumed that the system would be programmed to spot this occurrence. But it wasn’t and didn’t. I processed the data outside the system to spot the £500k of sales not invoiced!

3.     Cost leaks – does your company only pay for the goods and services it has received?

Most companies have a system for ensuring that payments are only made for goods or services properly authorised and delivered. However leakages will often occur with regard to the non-standard items.

In this case the problems occurred with the new fleet hire system. Car hire was often on a continuous basis. The hire company invoiced monthly (electronically). The expense type didn’t fit the existing system. So the fleet management department paid what was invoiced.

Twelve months later, when I established a system for checking that the charges were correct the company had overpaid for fleet hire by £176k.

Every business is different. So every business will have different areas where profit leaks. But, for all organisations, doing business creates assets, liabilities, costs and revenue flows. Capturing, safeguarding and analysing these flows is essential for a healthy business and healthy profits.

How might your business be ‘leaking’ profits? If you would like a complimentary review of your business please contact me here for further details.

 

 

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