How to Spot (and Fix) Hidden Profit Leaks in Your Business

You’re seeing strong revenue flowing in, your sales are up and your team is growing. But, your profits seem to be lagging behind. So, where’s the money going? As a business owner, profit margin improvement is something to prioritise. You might have impressive revenue and steady sales, but poor profits suggest something has gone wrong somewhere along the line, and that needs to change as soon as possible. A hidden profit leak could be draining your profit margins and, if you don’t spot these leaks early, they can grow into serious problems that threaten the sustainability and growth of your business.

Understanding Profit Leaks

Regardless of business type, industry or growth stage, profit leaks are a huge red flag, and they need addressing. It’s a sign that there’s a hidden inefficiency, oversight or flaw in your business, and that’s causing revenue to slip through the cracks without you realising it. There’s a whole host of profit leaks that businesses are at risk of, ranging from operational waste and poor design processes, to untracked expenses and employees wasting time without realising. They’re rarely big, bold and dramatic, and that’s the danger of them. Profit leaks are subtle, hidden and they blend into the day-to-day running of the business. It’s not always obvious when profit leaks are holding you back.

The Hidden Danger of Profit Leaks in Your Business

Don’t underestimate the danger of profit leaks, even if your business seems to be successful. These aren’t issues that feel urgent; they often go unnoticed until it’s too late. You might have healthy revenue, happy customers and a growing, talented team. But, that doesn’t mean you’re seeing the profit you deserve.

As your revenue has grown, so have your costs and if they’re not kept in check, profit margins are at risk. Plus, small inefficiencies can add up and worsen as the business scales. All of this results in your hard work not paying off. You’re doing more work, but you don’t have the profits to show for it. Eventually, profit leaks add up and before you know it, you’re out of pocket in a big way.

Looking for Profit Margin Improvement? Watch Out for Common Profit Leaks

Manual and Repetitive Tasks That Could Be Automated

Profit leaks can happen when your team is spending time on repetitive tasks – such as data entry, invoice creation, sending follow up emails and making reports – that could be automated. This type of manual work uses up a lot of time, time that your team could be spending on more valuable work. Plus, there’s a high chance of mistakes being made when work is done manually, which can lead to delays, time-consuming redos and unhappy customers.

When things are automated, tasks are completed quickly, mistakes are almost non-existent and people can spend time on more important tasks.

Poor Inventory Management

If you sell products, you’re at risk of losing profits because of poor inventory management. Overstocking, running out of stock and having a build up of products you can’t shift can all eat into your profits. Poor inventory management can negatively impact cash flow and shrink profit margins, by either losing you sales or tying up money in unsold products. That’s why keeping on top of inventory is a big part of profit margin improvement, and why a comprehensive inventory management system is key.

Underperforming Products or Services

Not all products or services are equally successful. You’re likely to have some that really take off and draw customers in, and some that sit on the sidelines, getting very little attention. Some products and services generate far more revenue than others, yet many businesses continue to sell low margin or even loss making offerings out of habit or because they’re scared of change.

These underperforming products and services use resources, including labour and marketing efforts, but don’t offer much in return.

To solve the problem, carry out a product or service audit regularly, looking at the profitability of each offering. Look at profit per item, sales volume and the time, labour and resources you use to deliver it to customers.

Inefficient Use of Team Time

Your team is busy, but that doesn’t necessarily mean they’re being productive. There’s a difference between being occupied and busy at work, and genuinely being effective. Inefficient use of team time leads to higher labour costs, missed deadlines and lower output per employee, even the scope of someone’s role expanding beyond what they’re actually responsible for.

All of this can hold profits back, but you can solve the problem by tracking employee time, holding regular check-ins to align priorities, and avoiding unnecessary meetings. It’s important that your team is focused on money-making projects and valuable tasks, as this is what keeps profit margins healthy and cash flowing in.

High Customer Acquisition Costs (CAC)

If you’re spending too much to acquire new customers, you’re going to eat into your profits. Whether you’re using paid ads, sales commissions or marketing campaigns, you need to be wary of spending too much to secure a new customer. Even if your sales grow, high CAC can eat into your profits, especially if those customers don’t spend much or they fail to become loyal to your business.

Focus on cost-effective customer acquisition techniques, such as referrals, retention strategies, and email marketing. By cutting your CAC, you’ll keep more money in the business, whilst also growing your customer base. Spend time improving onboarding and customer experience to increase retention and encourage repeat purchases.

Delayed or Inconsistent Invoicing and Payments

If you’re not sending invoices on time, not following up on unpaid invoices quickly and failing to enforce your payment terms, you’re likely causing a profit leak. Late payments delay cash flow and limit your ability to invest or operate as you would if you were paid on time. They can also lead to bad debts if you struggle to meet repayments.

Improve your invoice and payment processes by automating invoices, setting automated reminders and ensuring customers abide by strict payment terms. If your payment terms state payment must be made within 14 or 28 days, keep following up and reminding them until you receive payment.

How to Determine Where Your Profit Leaks Are Coming From

• Look at Your Financial Reports – The more you know about your finances, the better. Look at your profit and loss information, cash flow and gross margin, and ensure nothing stands out for the wrong reasons.
• Review All Business Expenses – It can be hard to keep up with business expenses, especially if you’re always paying for something or other. But, this is where a lot of profit leaks come from. Take a look at what you’re spending money on and flag anything that seems excessive or unclear.
• Speak to Your Team – It’s not always clear where time is lost amongst your team, especially if you have a lot of people to manage and you’re not working closely with them. So, speak to them. Ask where time is lost, where processes are frustrating and what’s slowing them down. You can use this information to make necessary changes.
• Track Time and Workflows – There’s a lot of time-tracking tools out there, so make use of them. They’re an excellent way to uncover inefficiencies and identify where workflows could be improved.
• Prioritise Profit Leaks by Impact – Not all profit leaks are equally detrimental to your business, so focus your attention on the most urgent. Start with the ones that affect profit the most, and slowly work your way through to the less important issues. Big profit leaks do the most damage.

Make Profit Margin Improvements Before You Scale

Scaling your business is probably one of your biggest priorities, but don’t get ahead of yourself. Scaling a business with hidden profit leaks is likely to end in disaster, as the inefficiencies will worsen under pressure. Before you know it, you’ve got a dozen profit leaks that you can’t get on top of. You might feel like you’re making progress, but unless you fix the leaks before you scale, your efforts could be wasted. The earlier you catch and fix profit leaks, the more margin and efficiency you gain.

Request a margin and profit audit from our finance team.