Managing Your Cash Flow
Seven ways your business could leak profit
6 min read
06 February 2017
If you are trying to improve the profitability of your business this year, it is important to identify the ways in which your business could leak profit.
Here I reveal seven ways in which your business could leak profit in 2017 and how to avoid these mistakes.
Mistake 1 – Not factoring in fixed costs during pricing
When calculating pricing, many are often too focussed on the gross profit margin and tend to neglect setting something aside for fixed costs or overheads. Business owners then wonder why they are making minimal profit, if at all!
Mistake 2 – Thinking that money flowing into a bank account means making a profit
If money is moving into the bank account of a business, this does not necessarily mean that profit is being made on this. Businesses can fail to take into account all of the factors when agreeing to provide a service at a given price. The price tends to be set by market forces but most bosses fail to do an initial analysis to find out if they can deliver the service at a cost less than the revenue received; while bringing in sufficient profits above both fixed and variable costs.
Mistake 3 – The job dis not done after a client has been invoiced
Next up on how the list of companies can leak profit is a fairly important factor often overlooked. It is not job well done as soon as an invoice is sent to the client for payment.
Bosses must make sure payment is collected on the payment terms agreed. It is pointless invoicing a client if the payment is not followed through and collected. After all, profit is not earned until the moment that the full amount for that invoice is received in the businesses bank account. Businesses need to be pro-active in collecting invoices.
Mistake 4 – Neglecting attention towards cash flow
Attention towards managing cash flow has to be one of the most important aspects of running and maintaining a business that doesn’t leak profit. If a business fails to pay it’s bills due to a lack of cash, then technically the business is insolvent – the main reason companies go bankrupt.
While this prospect should be enough to remind you to take care when managing your cash flow, it shouldn’t be the only reason. Careful cash management means reducing the risks to which businesses can become exposed to. Businesses which suffer from money problems have no safety net for unplanned costs and can also experience difficulties in obtaining funds for expansion.
Mistake 5 – Not reviewing your financial reports regularly
It is truly worrying how many assume the finance side of their business will be okay and in some cases do not know where their financial reports are, let alone regularly review them. This mentality is alarming. Not only are there legal obligations in terms of record keeping, but bosses could be at risk when burying their heads in the sand due to finances. Numbers are not something that should frighten you.
Mistake 6 – If you don’t budget your business will leak profit
A budget is a plan that sets the expenditure and income of a business over a certain time-span, typically annually – it’s a must if you want a business that doesn’t leak profit. Budgeting describes the process of using this budget and can be an invaluable instrument for managing your businesses finances. It helps to determine the best way for a business to control and make money, so it is vital to have one in the first place to stop any potential profit-leaking.
Mistake 7 – Unnecessary waste
Everybody dislikes unnecessary waste, but despite this it is likely that most businesses at some point are wasting money on unnecessary things. This can be through overpaying for a product or service to just buying things that the businesses simply does not need.
Business utilities are one major example. We have all seen the adverts that tempt us to comparison sites to find the best deal for our home utility bills and ultimately save us money. However, most businesses freely accept the tariffs offered by the utility companies, without fully knowing if it is a right fit, and are then locked into a higher tariff than is necessary. If the utility comparison sites work for your home utility bills, then of course you should be trying this with your business ones – it also works well to shop around for the best deals for other office essentials!
Kelly Clifford is a profit specialist and the author of ‘The Profitable Professional’. He is the founder of Profit in Focus and on a mission to help businesses to profitably THRIVE. Get a FREE preview of his book