August 22, 2019
ISSN# 1545-2646
Soft hidden dollars erode profit
As sound business leaders we regularly review our financial documents – Income statement, Profit and Loss statement etc. We might look at our bank statements online. We follow up on accounts receivables and payables. All good practices to keep the business in best financial status.
The question is – are you measuring and managing the slow, small leaks of soft hidden dollars tricking out the bottom of your business?
As a business leader you have the opportunity to pay utility bills for the operation of your business. It is the every month expense that just gets paid. Maybe you look at the trend of expenses for select utilities like electric or water. Most of the time it just gets paid.
I’m not suggesting that you do a detailed review of your utility bills but I’m using this as the basis of how a business can inadvertently drain real dollars out of the business by simply not paying attention to trends of expenses.
Let’s look at water for example. At a particular property the regular water bill suddenly tripled. The mental alarms went off and required investigation. Was there an underground broken pipe? Was someone stealing water after hours? What was causing this sudden and significant increase in water consumption. After looking at all the obviously possible causes, we asked the city to send out one of their public works people to extend the investigation. When the gentlemen arrived, he pulled out a small gauge with what looked like a variety of pin holes in it from small to increasing in size to about the dimensions of a pencil. He said that if your toilets run, if your sinks drips, if your production equipment leaks water all over the floor overnight even though it is not being used – all of these are consumption and it does not take much to cause a large jump in usage. He pointed to the small hole about the size of a pencil lead and said a faucet with this tiny amount of water dripping every few seconds could over the course of time triple your water bill. After he left, we found the leaky faucets and running toilets and they were promptly fixed.
This analogy of the dripping faucet is what happens in lots of business with many other areas in their business. Let’s look at a service company who sends technicians out into the field to solve customer issues. Many organizations work on a time and material basis so in theory each unit of time the tech is on location they bill for to the customer. This protects the company from getting into projects that take more than the originally estimated time. It does not protect the customers and after too many hours of resolution and expenses, the customer seeks a new provider. Your business loses future business which now has to be replaced with a new account etc. Some organizations use flat rate pricing models, so customers have a better understanding of the expense going in and the company shares in the performance of the project based on their typical service engagements. The better the company is at setting up these flat rate models based on their capability to perform the better the whole system can work. The challenge is that performance times are based on many variables and if your technicians are new or unfamiliar with the work being done then time over runs take place and the company now pays those expenses. The technician still gets their hourly wage, but the company absorbs the cost overrun which in turn lower profits.
This absence of managing talent, hours and overall performance is like the dripping faucet. We don’t directly see dollars washing their way down the drain but at the end of a cycle of time, money is drained out of the profits and the only one paying the bill is the company.
Is your company dripping away profits? Call JKL Associates a call at (313) 527-7945 or (407)984-7246 and let’s get that profit drip fixed.
Questions or comments – email us at partners@jklassociates.com or call our Offices – MI at (313) 527-7945 FL at (407) 984-7246
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