So far we’ve covered the following challenges for July:
This week I want to look at some profit traps and determine whether your business may be falling into any of them. Profit is why you are in business but sometimes the passion of the business owner or employees overcomes what makes good business sense.
There are a lot of ways to be unprofitable. Your challenge this week is to examine your business to see if you have fallen prey to any of these profit-killers. It is usually the fear of losing business or missing opportunities that causes us to lose sight of profitability.
- Have you “fallen in love” with your customers? Beware if you find yourself using huge amounts of time (and money) doing lots of work for your customers for which you are not being compensated.
- Are you trying to make it up in volume? Unless you are in an industry with a high proportion of fixed costs and know what your break-even volume is, this is a dangerous strategy. I have seen companies literally lose millions of dollars on this one.
- Are you creating work to keep your employees busy? Sometimes we add staff too quickly and are reluctant to let them go so we “create” work for them. “Busy work” is not profitable. Make sure you know why you are hiring, and have a clear profitability goal for those new hires.
- Are you able to accurately account for costs? Often only the direct costs associated with the project are identified which includes labor, raw costs of any materials. Remember that overhead, handling and storage of materials, office space, utilities, support personnel must be covered also. Forgetting this could cost you your business.
- Do you value quantity over quality? Taking on unprofitable business just to show your top line is growing is not a good business practice. Carefully consider volume discounts and make sure they are still profitable. Good customers pay on time and don’t demand discounts.
- Have you ever taken a project at a loss because you don’t want a competitor to get it? Perhaps you want to be able to display the name on your customer list, or you think after working with you they will give you more profitable business. That is a complete fantasy – it will never happen. Be willing to say no; let your competitors have those customers that aren’t profitable. Could be the best thing you do for them – and yourself.
Avoiding profit-killers is a must. If you find yourself practicing any of the above, stop immediately. Acknowledgement is the first step towards losing unprofitable business, and getting your company to the next level.
To Your Success,
The Rector Group
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