I visited with a business owner last week and he told me a story that caused me to go into cardiac arrest–figuratively, not literally! He told me that after making approximately $60,000 in sales last month, he was only able to take home less than 9% of that for “profit.” What was even more interesting was that more than 50% of his sales was from a product which has a 100% margin on cost. The question becomes, what happened to the profit? Well, that is the question that he asked as well!
Now, this question raises a rich plethora of areas in which to explore for lost profitability. Are expenses out of line with revenues? Did he buy something that he did not need? Was inventory shrinkage a factor this particular month? Was there an error in the posting of the various accounts? These are just some of the questions that I thought of as we were talking. Actually, I thought of many more questions, however did not address them.
The key here is be constantly vigilant on your business costs– each and every cost. Often times, research has revealed that once costs get out of control, it is very difficult, though not impossible, to bring them back in line with revenue generation.
Although this particular business owner elected to work the problem himself, I doubt that the business owner will take a careful, critical eye to each cost that he incurred this particular month. This is one place where the “why” question is important. WHY did we buy this? WHY did we buy so many? WHY do we need it? WHY don’t we wait? You get the idea– just keeping asking WHY– you will get to the end root cause– which may not be the answer that you really thought was the right answer!
Research has shown that some big box office suppliers provide “bonus” cards to their customers. Interestingly, once a consumer has a “bonus” card, he/she will buy more product than what they actually need or require, thinking that they got a “bonus” from their card. Yes, the consumer did get a discount, but bought more product than was required at the time.
If you are having profitability issues, careful, critical analysis of the WHY question is the best place to start looking to see where, if anyplace you may have a profitability leak.