Here's a true story from my partner Stuart Carter. I'll be back with some action-points at the conclusion of this blog. By definition, a “leak” is an “unintended” hole that enables something to enter or escape. In business, what is escaping and leaking is “Money-Profits!" , your business and personal "money". That hole, crack flaw was created by accident as no one intentionally wants profits to leak. Recognizing and fixing that leak is critical in all aspects of your operations.
You cannot sell yourself out of a profit leek. Increasing sales has costs attached, plugging a profit leak, is pure bottom-line dollars. Years ago, the accepted thinking was that every dollar saved is worth $20 in sales. Now it could be as high as every dollar saved is worth $50 in sales.
Recognizing a profit leak is difficult because often times it doesn't jump out at you, if it did, you would certainly change it. But if you learn and practice continuous “Targeted Profit Therapy “, plugging those leaks will be an accepted practice for your company and also a great motivator for your organization. It feels great to save money. It feels even greater to directly affect your bottom line.
I will relate a simple story as an example. Years ago, as a young professional, I was given a purchasing task that had been done the same way for 16 years. When I asked why, I was told “because that is the way we have always done it, just keep doing it the same way". Well, that just didn't make sense to me and I challenged that reasoning. Without disrupting production, I sent orders to the current supplier at the established price but also sent quotes to three other suppliers for the exact same item.
I was shocked when the three quotes were 30% lower than the current supplier for the exact same item. In addition, “shipping and handling fees" were absent. The company that I worked for had a massive profit leak that had to be fixed. I didn't get angry, it was not the supplier's fault, they were just maximizing their profits. I called the current supplier, accepted responsibility for the past 16 years’ worth of orders, explained how I valued them as a supplier because of their great service, but stated clearly that to continue with us , their costs would have to be in line with their competitors. They lowered their prices to market-price. The profit leak was fixed and the immediate savings were $100K in the first month.
While, fixing your profit leak may not result in a six-figure immediate saving, it will be significant, contagious and important. The process of challenging some existing or comfortable practices needs to be adopted and is not always easy. The process may expose some serious flaws but focus on the upside, don't waste time pointing fingers and engaging in "you should have". Stuart Carter.
Action Points for Profit Leaks:
- Challenge everything! Leaks are not limited to operations or just purchasing functions.
- Start with your long-term suppliers. Bid everything. Compare apples-to-apples and don't overlook "shipping and handling"
- Ask for price and terms concessions. Your customers demand it, so should you.
- Are your sales leaking profits? Do you have a solid process for price, discounts and other terms? The goal of sales is not getting deals. The goal of sales is getting deals that are profitable.
- Be extra careful when it comes to digital media - What happens in Vegas should stay in Vegas. Don't gamble with your money on offers that are too good to be true, like "I can place you at #1 on Google".
- Email campaigns may seem cheap. "Send it and forget it" - They are not. Work with a reputable firm that understands the science of email marketing and SEO. Pressing "SEND" may feel free but what about the work and hours you put into it? Your supplier is charging you for it - you should charge yourself as well!
- Stop leaks before they happen but focusing on ROI (Return on Investment) is always the first-step.
- Just because you're not pulling cash out of your pocket, does not mean it is costing you nothing! Time is money! Busy work is a profit leak. Efficiency is money in the bank.
- A former employer was battling the introduction of an automated process with the following question: "If it'll take 20 minutes instead of two hours, what will Sandy and Lisa do with the rest of their time"? Sound familiar? Humans are best when it comes to personal communication. So, the forms, the filing, are all done automatically now. Sandy and Lisa should get on the phone, confirm receipt of the form, advise the customer when they should hear back from them, ask if there is anything else they can do and..thank them for their business. The next time you fail this customer, and you will, they will remember the personal touch and pleasure of doing business with you. You'll get another chance. That's stopping a leak.
- Did we say "question everything"? Good.