08 Jan 5 Ways Your Small Business May Be Losing Money and How to Stop It!
As a business owner, you have a responsibility to make money so that your business survives and can provide for both your family and your employees. Without closely tracking the financial aspects of your business, you risk losing money and missing out on opportunities to increase profits. You have to continually assess and improve your business inside and out to keep it in good health.
Like a doctor conducting physicals on fully clothed patients—things might look good on the surface, but without taking a closer look, it’s impossible to know what kind of shape a person is in. The same is true for testing the health of your business. Here are five places to look for money seeping out and ways to prevent further losses.
1. Late and Missing Payments
Late and missing payments come at a cost to your business. If you’re waiting for payments, your business—which was created to provide products or services—now also functions as a lender. Money that’s owed to you isn’t available to cover operations, which could force you to borrow money.
For every payment you’re waiting on, the negative impact it has on your business grows. And the longer you wait to collect on each payment, the more money your business loses.
Action Step: Plan to carefully go over accounts payable and receivable to make sure you haven’t let any payments fall through the cracks. Next, carefully review the way you collect payments from customers. Consider implementing the following policies:
- Full payments are required within 30 days of billing. (This may be difficult to enforce if you’re working with state or federal agencies.)
- Charge a service fee of 1 ½ percent for late payments. (Make sure the agreement you have with your customer clearly explains this charge.)
- Set an alert so you remember to follow up and collect on late and missing payments after 30 days.
If you are indeed missing payments and frequently struggling to get paid from customers, review and update your billing and collection procedures to close the gap.
2. Underestimating Product and Job Costs
To know how much to charge for a job, you need to know exactly what it costs your business to perform it. That’s easier said than done. All projects have obvious hard costs (materials, resources, etc.) as well as hidden soft costs (time, planning, etc.). Although as entrepreneurs, we are risk takers, we shouldn’t be gambling on whether or not our products or services make money—but we so often do.
Action Step: Calculate the actual cost of recently completed jobs to better estimate projected costs of future jobs. By carefully documenting all relevant costs of what’s already been done, you’ll be able to better estimate the cost of upcoming projects before you submit a bid or provide an estimate. Spot-on estimates and bids ensure that you are paid in full for all work, with no loss due to miscalculations in costs.
3. Employee-Related Losses
Your team impacts every aspect of your business. Even if you closely oversee and manage your employees, unnecessary and unexpected spending and expenses can go unnoticed. There are three primary ways businesses lose money due to their employees:
- Time Waste: In a 2014 survey of 750 employees, 89% of employees admitted to wasting time during the average workday on non-work–related activities. Whether it’s intentional or not, time wasted throughout the day is costing your company money. The more you can learn about how and why this time is wasted, the better you can limit or eliminate this waste to get the most value out of your employees. This is why many office-based employers monitor computer activity and block websites employees are likely to waste time on, like Facebook, YouTube, and sports websites.
- Improper Use of Resources: Employees that use company resources like vehicles, tools, printers, or even software for personal needs are wasting your time, resources, and money. It’s important to monitor the use of resources and have policies in place to make sure employees know what is expected of them, as well as disciplinary procedures so they understand the consequences of doing otherwise.
- Theft: Employee theft is a major problem. Out of the $60B in products lost each year in retail, employee theft is the leading culprit. Regardless of industry, employees stealing from their employers is something that should be protected against by having people and processes in place to track inventory, bank accounts, and expenses.
4. Over Your Head Overhead
Depending on your industry, overhead costs—which are the costs on your income statement other than direct labor, direct materials, and direct expenses—should be around 18% to 22% of your total costs. If you don’t know what your overhead is, which many small businesses don’t, it can quickly exceed what’s reasonable. High overhead turns much of the incoming cash that would go to profit into money spent on things like supplies, advertising, and travel expenditures that may not positively impact sales or profits.
Action Step: Learn how to calculate and carefully track your overhead costs and maintain a reasonable overhead rate based on the nature of your business and your industry.
5. Neglected KPIs
If you’re not measuring the most important functions of your business, you can’t accomplish your goals. Key Performance Indicators (KPIs) measure specific aspects of your business and how they are performing, like profit, cost of goods sold, customer acquisition cost, and even customer satisfaction rates. Defining what KPIs your business will track depends on your business’s goals, but few can be measured without intimately knowing your company’s financials.
Action Step: Define your business’s KPIs and track them monthly. Check out “5 Tips for Defining Key Performance Indicators” to get started.
Need help finding the missing money in your business? Contact Straza Consulting to learn where to start.