Is your business turning over £1 million or more but it’s still a struggle because there are profit leaks?
Sales might be strong with a growing team and your customers are seemingly happy. But despite all that, your profits aren’t as good as you’d expect.
Small profit leaks can soon become a big problem. And unless you stop to identify the issues, they could become catastrophic.
Part of that issue is you feel like you’re failing the company in some way. But did you know that you’re not alone?
Profit leaks? You’re not alone
A recent report from the Institute of Chartered Accountants in England and Wales (ICAEW) says that company directors shouldn’t feel ashamed when their businesses hit problems.
Its insolvency director, Bob Pinder, says in an article in The Gazette : “We believe that a change in attitudes is critical in order to successfully avoid substantially increased corporate insolvencies – confronting business issues, rather than being ashamed of them.”
You may be nowhere near insolvency but still struggling. You really are not alone. So, don’t fear stepping up to sort out the issues and work out why your profits aren’t matching your increasing turnover.
A study by data company Sagacity says that £244 billion is being lost annually in the UK by businesses through uncollected revenue! It proves that business owners really need to know their numbers to ensure their company is in good health financially.
What are profit leaks?
Many businesses focus on growing revenue. They assume that profits will improve as revenue increases. In theory, that should be the case. But costs also increase – and small leaks can hit profitability while everyone is concentrating on striving for sales.
Individually, they may not look significant. But together, they can be worth tens of thousands of pounds a year.
Here are some of the most common profit leaks we see in growing businesses.
1. Customers who aren’t as profitable as you think
Turnover can be a dangerous number to focus on. A customer whose order is worth £200,000 sounds impressive. But if that customer requires excessive staff time, constant amendments, urgent deliveries, discounts and extended payment terms, the actual profit contribution could be surprisingly small.
The question isn’t: “How much does this customer spend with us?”
You should look at how much profit they generate. Could the margin be much smaller than you think? Or is that customer actually costing you money?
Review your largest customers and look at the true cost of servicing them. You may discover that some of your biggest accounts are not your best accounts.
2. Pricing that hasn’t kept pace with costs
One of the easiest ways to lose profit is to keep charging yesterday’s prices while paying today’s costs. Wages, taxes, energy, insurance, materials, software, premises and professional services can all increase over time.
But pricing often doesn’t move with them.
This is particularly dangerous for businesses with long-standing customers. It can feel uncomfortable increasing prices for someone who has been buying from you for years.
But if your gross margin has quietly fallen by just a few percentage points, the effect on a £2 million business can be substantial.
A regular pricing review isn’t about charging more for the sake of it. It’s about making sure you are being paid appropriately for the value you provide.
3. Discounting that has become a habit
Discounts can be useful for winning business. But there is a problem if they are given automatically. A 5% discount might not sound significant.
If a new customer orders £200,000 of your goods and services, you’ll be giving away £10,000 of revenue. If you do that for every new client, it soon adds up!
Unlike many costs, discounting comes directly off your selling price.
Before offering a discount, ask: What are we actually getting in return?
A larger order? A longer contract? Faster payment? Reduced servicing costs?
If it’s just because “the customer asked”, it may be worth reconsidering.
4. Too much stock sitting on the shelf
Stock is another area where growing businesses can hide a significant amount of money. It is easy to think of stock as an asset. And technically, it is.
But excess stock has absorbed cash that could otherwise be sitting in your bank account or being invested elsewhere.
Slow-moving, obsolete or surplus stock is particularly damaging because you may eventually have to discount it simply to get rid of it.
Ask yourself: How much of our stock has genuinely earned its place?
The answer might be uncomfortable.
5. Employees spending time on low-value work
Your biggest cost may also be your biggest opportunity. As a business grows, processes that worked perfectly well at £500,000 turnover can become inefficient when you reach £1-2 million.
People spend time:
- Re-keying information
- Chasing paperwork
- Correcting mistakes
- Producing reports manually
- Answering repetitive questions
- Managing inefficient processes
None of these activities necessarily appear as a separate line on your profit and loss account.
Instead, they appear as payroll costs.
The challenge is to distinguish between people being expensive and people being unproductive because the business hasn’t evolved its systems.
Sometimes a relatively small investment in technology, automation or better processes can release significant amounts of productive time.
6. Poor credit control
Every unpaid invoice represents money that belongs to your business but isn’t currently available to you. And the problem is actually bigger than cash flow.
Your staff may be spending hours chasing customers, making calls and sending reminders instead of doing work that generates revenue.
Research from the Small Business Commissioner found that more than 1.5 million UK businesses are affected by late payments each year. It claims £26 billion is owed in overdue invoices at any given time. Businesses affected by late payments reported spending an average of 86 hours a year chasing money.
For a business turning over £1 million to £3 million, tightening credit control can improve both cash flow and profitability. And that can also improve your chances of growth.
7. Suppliers who haven’t been reviewed for years
Loyalty is valuable. But automatically renewing the same contracts year after year without reviewing alternatives can become expensive.
Look at your significant suppliers and ask:
- Are we getting the best price?
- Are we actually using everything we’re paying for?
- Could we negotiate better terms?
- Has our business changed since the contract was agreed?
- Could consolidating suppliers save money?
You don’t necessarily need to change suppliers. Sometimes simply telling an existing supplier that you’re reviewing your costs can produce a better deal.
8. The “small” expenses nobody owns
Spending £50 here, £100 there. A software subscription nobody uses. A service that is no longer required. Unnecessary delivery charges. Duplicate subscriptions. Expenses that were approved years ago and have simply continued.
None of these will transform your business individually. But add them together and they can become a significant annual cost.
The larger a business becomes, the easier it is for these expenses to disappear into the background.
A regular overhead review can uncover some surprisingly easy savings.
9. Growth without enough margin
Perhaps the biggest profit leak of all is growth that doesn’t generate enough margin.
It’s possible to increase turnover, employ more people, take on more customers and become considerably busier while making very little additional profit.
That’s why revenue growth should never be the only measure of success. A better set of questions is:
- Are our margins improving?
- Is profit growing faster than turnover?
- Are we generating more cash?
- Is each additional £1 of turnover making the business stronger?
- If the answer to those questions is no, growth itself may be hiding the problem.
So, where are your profit leaks?
The good news is that you don’t necessarily need to make dramatic changes.
You may simply need to identify the areas where money is gradually escaping.
Know your numbers. Start with five of them:
- Gross margin.
- Debtor days.
- Stock levels.
- Staff costs.
- Overheads.
Then compare them with previous years. Look for the numbers that have moved significantly faster than turnover.
That’s often where the leaks are hiding.
Profit isn’t just about selling more
For a business turning over £1 million to £3 million, improving profitability isn’t necessarily about finding another £500,000 of sales. It could be about making the sales you already have more profitable.
You might need to think about increasing prices, improving credit control, reducing waste, reviewing suppliers or making better use of your team’s time.
At Concept Accountancy, we believe your accounts should do more than tell you what happened last year.
They should help you understand where your business is making money, where it is losing money and what you can do about it.
Because the quickest way to increase profit often isn’t to find more customers. It’s to stop losing profit from the ones you already have.
It’s all about knowing your numbers – and understanding them. If you’d like help to plug those profit leaks, contact our team today for a chat.
