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Ten Profit Leaks That Will Drain the Bottom Line

By William Lynott

Increasing sales is not always the road to increasing profits. In fact, invisible profit leaks in a distributorship could convert increasing sales into decreasing profit.

Here are 10 of the most common and costly profit leaks, along with advice on how to keep them from harming your business this year—and in all the years to come.

1. Forgetting that electricity is money.

Don’t look on that huge electric bill every month as a necessary evil. Forgetting to adopt procedures to save energy can provide a costly profit leak. While a distributorship does require a lot of electricity use, there are steps that can provide significant savings in your monthly bill. For example, swapping incandescent bulbs for compact fluorescents can make a significant cut in electricity usage. Wherever possible, switching regular incandescents for low energy CFLs or LEDs, despite the higher initial cost for the bulbs, can provide big savings over the projected 10-year life of the bulbs.

If you’re in one of the states where the industry is deregulated, you can shop around for your energy supplier. In some cases, making a switch could save as much as 5 percent to 10 percent of you electric bill.

Another potential for lowering electricity cost is an annual inspection to make sure that your HVAC system is operating at top efficiency. Leaking ducts could reduce energy efficiency by as much as 20 percent, according to Ronnie Kweller of the Alliance to Save Energy.

Perhaps the best suggestion of all, assign someone as “Energy Czar” with the responsibility of searching for ways to lower overall energy costs.

2. Allowing high employee turnover.

High employee turnover can be a very costly profit leak because of the time it takes to rehire and retrain staff. Hiring the right people from the start, say the experts, is the single best way to reduce turnover. In addition to the right experience, interview candidates carefully to make sure that they will fit in comfortably with your present managers and co-workers.

It’s also important to pay attention to employee’s personal needs. Do your best to provide a positive work environment by offering flexibility in scheduling, personal recognition, and periodic reviews to make sure that compensation and benefits packages are kept in line with current industry practices. Remember that employees need respect and recognition from management and, wherever possible, the possibility of moving up in the organization.

Creating an organizational chart and incorporating job descriptions, along with specific policies and procedures into your human-resource management function will help you define each employee’s responsibilities. By clearly communicating your expectations to your employees, you give them a framework to help them to measure their own level of performance. That, in turn, will help to reduce turnover.

3. Ignoring what people are saying online.

In this technological age, the first place that unhappy customers go is the Internet.

It’s human nature to vent after undergoing a negative experience, and the internet provides an easy setting for people to tell the world about their unhappiness.

If you’re not staying on top of what’s being said about your business online, you’re missing a potentially harmful profit leak. Potential customers who come across a negative comment about your distributorship aren’t likely to call you to let you know, but they are likely to look for another source to fill their needs. Most people place a high value on what other people say about a business. If someone says they were unhappy with your service, potential customers are likely to assume that they will be unhappy too. All of this is a good illustration of how what you don’t know can hurt you.

Doing your best to encourage positive feedback can help to protect against a nasty profit leak. Equally important is responding to a negative comment in a helpful way in an effort to return a straying customer to your fold.

4. Ignoring the forgotten customer.

All of your customers are your competitor’s prospects, and always will be. In today’s competitive business environment, customers will switch suppliers at the slightest provocation. Just because you get their payment each month doesn’t mean you own them forever. Put into place a system for touching base now and then with every one of your customers. Every time you take care of a problem or a question from a customer, you’re cutting your competition out of the picture and avoiding the costly penalty of a lost customer.

5. Failing to guard your most precious business asset.

“Pay your best employees good salaries and treat them well,” says Sally Mounts, Ph.D., President Auctus Consulting Group, Washington, Pa. “Successful owners know that their most valuable resource is the people they employ. They reward them liberally and encourage their growth. They look for ways to affirm their value to the company through personal attention and acknowledgement. The result is employees who stay with the company for years, saving hundreds of thousands of dollars the owner would otherwise be spending in training a succession of new hires.”

6. Poor control of accounts receivables.

In the credit world, one rule holds supreme: The longer it takes to get paid, the greater the risk that you won’t get paid. That’s why neglected accounts receivables can grow into a major profit leak. Never allow accounts receivables to go untended. You’ve earned that money; you have a right to it; you need it.

Dunning late-paying clients may be an unpleasant duty, but close monitoring of accounts receivable files and following through on late payments is as important to a company’s financial health as the quality of the products and services it offers. If your customers learn that a company is cavalier about money owed to it, they will stretch patience (and cash flow) to the limit.

7.  Breaking promises.

Surveys show that broken promises are always among the most prominent reasons why customers abandon a business. Should you find yourself in a position of having to break a promise, any promise—no matter how seemingly harmless— always contact the customer as soon as you learn about the problem. An early explanation and a sincere apology will go a long way toward easing the customer’s frustration.

And it works the same way with employees. “The workplace is full of unwritten psychological contracts,” says Mounts. “One is that bosses must act with integrity, keep their word, and follow through on things they’ve promised. A boss who breaks this vital precept will never be viewed in the same way; the damage to the work relationship is virtually irreversible. Don’t fall into that trap. Keep your word — literally, figuratively, and psychologically. It will pay huge dividends in employee loyalty.”

8. Being a finger-pointing manager.

When former President Harry S. Truman coined the phrase, “The buck stops here,” he acknowledged his willingness to shoulder the blame when things go wrong. He put his subordinates and constituents on notice that he wasn’t a finger pointer.

If those around you feel that you’re never willing to shoulder even part of the blame for business miscues, they’ll withdraw from the kinds of decision-making and innovative thinking that could make your life easier and your business more successful.

When things go wrong, Consider the possibility that your instructions weren’t clear, or that the involved employee made what reasonably appeared to be a good decision at the time. Once in a while, accept the blame even when you know you weren’t at fault. That’s a sure way to ban the destructive finger pointer from your business culture.

9. Allowing telephone sickness.

Despite the high cost of getting the telephone to ring, many distributors fail to monitor the manner in which incoming calls are answered. Telephone sickness is one of the most damaging profit leaks because it so often goes undetected.

In order to eliminate the profit leak caused by poor telephone handling, you must train everyone in your organization to understand the power of skillful telephone usage, and the damage that telephone sickness can cause. It’s important that the telephone is always answered promptly, never more than three or four rings. Never leave a caller on hold for more than a few moments. Leaving a customer on hold for more than a minute or two is one of the surest signs of telephone sickness.

A ringing telephone means that a customer or prospect is in need of help, failing to respond properly to that need will almost always mean a profit leak. Every time a customer or prospect calls with a problem, you have an opportunity to win him or her over. If you don’t, someone who will is usually only a click away.

10. Failing to keep a close eye on competitors.

Prospects and customers alike are well acquainted with your competitors. They know the level of service they offer, the friendliness and professionalism of their employees, and their ability to promptly and accurately fill orders, and you should be too. In today’s competitive environment, your customers are ready and willing to switch suppliers for the least of reasons. Your job is to make certain that you don’t give them that reason.

While banishing these harmful profit leaks won’t solve all of your operating problems, it will help to boost your bottom line now and in all the years to come.

 

William Lynott is a veteran freelance writer who specializes in business management and personal and business finance. Reach him at lynott@verizon.net or blynott.com.

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