The Australian Small Business Blog

Monday, March 16, 2020

Are there Parasites Eating Your Profit?

by Dr Greg Chapman

Many hard working business owners find that in spite of an apparently healthy turnover, at the end of the month, there is little left over to pay themselves. The sales have been ok, their costs have not risen appreciably. What is eating their profits?

Even though sales may have been healthy, there are a number of factors that can be holes under the water line of your Profit Statement – invisible to the naked eye.

Firstly, are there hidden cross subsidies in your business?

This happens where you have a marginal or even unprofitable product or service being propped up by more profitable services. Every sale of the marginally profitable products suck gross profit from the healthy ones. These products are like parasites hidden inside your business’ body feeding off your body’s nutrients. As you increase the sales of these products, the more damage they do to your business.

The solution is to undertake a proper analysis of your profit structure so that the parasitic products are revealed, and appropriate treatment can be provided.

Secondly, are your costs per sale disproportionately high for some or all products?

It is often just as much effort to make a high value sale as a low value one. When you look at the full cost for each sale, including the cost of you and your staff’s time spent with those who both did and did not buy, these costs can be become significant, especially for smaller value sales. This sales time is often invisible in your Profit statement. The solution is to cease supplying the low value services and to improve the conversion rate so that the overall cost per sale decreases.

Thirdly, are your margins gradually being squeezed against growing overhead costs?

Over time, cost pressures can erode margins while the overheads grow. Even small changes can have a significant bottomline effect if at the same time owners find it difficult to increase prices. A 10% change in costs can wipe out your net profit.

Certainly, owners must keep an eye on costs, but the solution is to review prices and revise the marketing strategy so that they can be increased. This is dealt with in some detail in Price: How You Can Charge More Without Losing Sales.

Finally, do you have aging assets with declining productivity that you can’t afford to replace?

As business assets age, their performance will decline. This may be due to the additional running costs and increased downtime, or it may just be that there are better solutions now available that your competitors use and that your assets are now reaching their use-by date. It could be equipment used to produce the products, or perhaps a website that looks old and tired and just does not generate the traffic any more. An additional problem arises because as this happens, there is a decline in revenue and you can no longer afford to replace the asset so your productivity continues to decline.

The solution is to make an allowance for aging assets each year and not to take all the left over funds as profit. A business that does not allow for replacement of aging assets is unsustainable.

These are just a few of the hidden profit parasites that may be bleeding your bottom line. What are you doing to inoculate yourself against these profit parasites?

May Your Business Be –As You Plan it!

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Dr Greg Chapman is the Director of Empower Business Solutions and is Australia's Leading Advisor on Emerging Businesses and provides Coaching and Consulting advice to Australian Small Business Owners in Marketing & Business Strategies Planning & Systems. He is also the author of The Five Pillars of Guaranteed Business Success and Price: How You Can Charge More Without Losing Sales.

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