Think HBR

The search for hidden profits

Allan McKeown
Prosperity Advisers Group
Are you maximising your business’ profit potential? Here are some common ways businesses miss out — and how to fix them.
On the surface, business is guided by some fairly simple principles. You produce a product or service at a cost and sell that product or service at a markup that is sufficiently large enough to turn a profit without pricing you out of your target market.
But underneath that Business 101 definition is a host of other factors that invariably come into play when managing a business made up of a multitude of moving parts. If you’re in growth mode, you’re also likely to be adding parts every year.
If those factors aren’t managed correctly, you could be leaving money on the table. Those who advise businesses on lean and efficient practices call it hidden profits, and it is made up of the sum total of money lost when items aren’t priced correctly and wasteful practices that lead to unnecessary financial drain.
If you have a whole bunch of customers, you might have a decent rate of average profitability, but when you segment your customers, you are likely to find that certain types of customers are making you far less money than other types and you should take a look at why that is.
Ultimately, it comes down to the efficiency and effectiveness of your business practices, and often, that means streamlining your practices so they’re easy to understand and control.
The task of maximising your profits is a large-scale one that requires constant vigilance. But it’s also rooted in common-sense principles that are central to good business.
Analyse the numbers
Profit and loss statements can tell you a lot, but they really only tell a part of the story when it comes to your company’s money.
Gross profit numbers are aggregate numbers, and they don’t tell you where your profits are strong and where they’re weak. Lots of business owners look at their profit and loss statements and see a gross profit of say 40 percent. But they might not realise that within that aggregate number some products might make 20 percent, some might make 70 or 80 percent, and it doesn’t always correlate to sales volume.
Some of your best-selling products may be yielding the thinnest profit margins. If that’s the case, you may have made an error in pricing to the market, or internal inefficiencies are leading to cost overruns in the process of bringing the product to market. Analysing every part of the process for needless steps or poorly defined steps and redundancies can help you eradicate waste. In addition, compare your prices to those of the competition. You want to price competitively, and below the competition, when possible, but not so far below that it’s eating into your margins.
Consider your sales opportunities Many products and services lend themselves to add-on sales opportunities. If you don’t offer those add-ons, or your sales staff doesn’t do an effective job of selling them, you’re missing out on one of the most basic forms of profit maximisation.
The little things add up. If you run a manufacturing company, you can add a service agreement to a big-ticket product, which is a timetested way to increase profits without much committed in the way of resources or manpower. However, if you bundle multiple services as part of the plan and charge a nominal but mandatory convenience fee for the bundling it’s additional money attached to each sale.
You can also find additional sales opportunities by understanding the pain points of your customers. If your company can solve problems, you’ll develop a loyal customer base of grateful clients who view money spent with your company as money spent wisely. Loyal customers equal repeat customers, which not only means increased profits but increased profits on a steady basis moving forward, as those clients funnel regular business through your door.
Eliminate wasteful practices
Wasteful practices are one of the biggest profit eaters in any type of business. If processes contain too many steps that delay results, if there are tasks that don’t fall under anyone’s job description and are subsequently piecemealed out, those things can affect your efficiency and, by extension, your bottom line.
Good organisation can cure a lot of problems in your accounts receivable process for example. Define roles in your accounts receivable department, including who is in charge of follow-up calls on delinquent payments and how many days you are giving customers to send the cheque.
Keep track of all of your accounts receivable data in a single location.
Smaller businesses might be able to keep track of everything with a basic spreadsheet. As businesses grow, however, the need arises for more sophisticated software built specifically for managing receivables.
There are many other areas to address with an eye toward eliminating waste and making your business leaner. Do you have the right amount of salary committed to the right areas? Sometimes eliminating positions isn’t the only way to cut costs. An employee, or group of employees, might be performing tasks that should be categorised under another department, which can take overhead away from an underperforming department and place it in a department that is better suited to operate with the additional overhead.
In addition, be reluctant to take on additional overhead costs. You might think you are careful with regard to adding overhead costs, but it’s very easy to spend money when you have a good month or quarter.
Some business owners treat extra overhead almost like a reward for themselves. You have a good month, come in over sales projections, and you hire an assistant, or add on to the office. That’s great, until you have a bad month and still have to pay those bills. When you spend your money, make sure it’s on a valid need. Otherwise, it’s more wasteful spending that’s eating into your profit margin.
Wasteful practices equate to dollars tied up in resources, dollars that could otherwise be added to your bottom line. It’s not just about making money; it’s about how you spend it.
Don’t get caught up in the distraction
Every company leader has to have the ability to pull back and look for undeveloped lines of business and ways to improve internal efficiency. But you’ll never be able to take those profit-maximising steps if you’re working in the business instead of on it.
If you feel the need to involve yourself in every email, phone call and general distraction that you encounter, you’re not leading in a way that’s going to allow you to find the unexplored areas that could boost your profits.
Those distractions can prevent you from analysing what’s ahead; you should be looking at leading indicators and reacting to those in a way that allows you to maximise your profits. But many business owners don’t take that time. They get caught up in the day-to-day stuff and end up looking at lagging indicators of sales and financial performance and by then, it’s too late to take corrective action.
Set goals and maintain a larger like focus on the business priorities — to ensure that you maintain the proper outlook with regard to profits and performance, and don’t get bogged down in things that should be delegated.
For further information contact Prosperity Advisers Group on (02) 4907 7222, email or visit
Allan McKeown Allan McKeown

is CEO of Prosperity Advisers Group. He has over 25 years experience providing corporate assurance and business advisory advice and services to a wide array of clients. Allan's career started with global accounting firm Ernst & Young. He also co-founded Sneddon McKeown Chartered Accountants in 1989 and was appointed to the role of Managing Partner in 1991.