Submitted by Andrew Harwood on
Profit leaks within organisations across the UK are proving a huge cause for concern. Studies have shown that many companies don’t have the visibility to identify inefficiencies within their end-to-end operations, despite the fact there are significant savings to be made for those who can “plug the leaks”.
We define “profit leaks” as any inefficiencies that increase costs or impact on sales or margins, and can occur anywhere within an organisation. These losses can manifest themselves as anything from overspending and poor procurement procedures to missed sales opportunities.
It is no secret that every organisation has profit leaks, but identifying where these leaks are happening is a huge challenge. The most common problem for companies is the lack of timely data on which to analyse operational effectiveness due to disjointed systems and mismatched KPI’s across the business. Taking the time to analyse the flow of transactions through an organisation and the key metrics which should be in place at each stage, can help to build a case for change. The result is more available profit that can be invested back into the organisation and its workforce.
Most business owners know that profit losses exists within their organisation and probably suspect which areas represent the largest potential for improvement, such as sales and marketing, operations or indeed, the finance function. They also probably know some of the specific activities creating these losses.
These normally include:
• lost sales opportunities
• high customer turnover
• poor project profitability
• late or inaccurate billing
• increased bad debts
• poor stock availability
• low staff utilisation
• banking errors
• spiralling administration costs
By understanding how each function within the organisation measures success, and having a clear idea of current performance, it may become apparent that additional action is required to improve delivery against existing key performance indicators (KPIs). Trying to pinpoint actual losses is the biggest challenge, with many businesses suspecting where and what the general inefficiencies are, but to pinpoint each one requires accurate and up-to-date information. Only once this has been achieved, can organisations embed KPIs within each department for the ongoing effective management of the business.
A recent independent survey identified 72% of respondents believed that operations leaked the most profits, 56% felt sales and marketing were the main culprits whereas 31% felt finance was the biggest source of loss.
Looking at the results more specifically, lost sales opportunities, poor project profitability and low staff utilisation were all among the top areas of profit lost. It’s no surprise that finance represents a smaller proportion of losses as this department traditionally has more visibility over its data than any other area of the organisation and with this brings greater control. This is in stark contrast to, say, sales and marketing or operations such as project teams or the shop floor in a manufacturing company. As they generally face less strict legislative requirements, they don’t have the equivalent audit procedures and processes in place. This unknown quantity means that the finance function, and the specific departments concerned, are often not even aware of missed opportunities; it may simply come down to a ‘gut feeling’ that this may be the case with no data to back it up. Because of this, it’s impossible for organisations to comprehend the true scale of the issue.
If we look at the three main areas within organisations that leak profits, we can review the different issues that each are facing.
Business Development, Sales and marketing
The business development, sales and marketing teams’ roles revolve around five main objectives: management of opportunities and the pipeline, generating and following up leads, deploying campaigns, and account management. Structured measurement and reporting is fundamental to the effectiveness of this department, but in the rush to make the sale this is often missed. For example, if the pipeline isn’t managed effectively, it might haemorrhage money as interested prospects are not handled successfully, resulting in them taking their business elsewhere.
The organisation also might lose out if the sales team doesn’t provide timely feedback on prospects to the marketing team. For example, it’s easy to lose track of a prospect that’s not interested now, but may want to buy in six months time. Without a joined up sales and marketing pipeline, opportunities will be missed, and therefore this represents a significant source of profit leaks.
A lot of money is spent on acquiring new customers. For example, an organisation might calculate that every sales meeting a staff member attends costs approximately £3,000. Just one missed sales opportunity would therefore have significant cost implications, as well as the impact on turnover of the lost sale.
Lost sales opportunities as the largest area of profit loss, this is a good place to start in an end-to-end analysis of potential leaks. By first understanding the cost of each lead to the business, a case can be made for investment in technology, such as CRM solutions, to better manage the sales pipeline.
Not many organisations know what each lead costs to the business, but with marketing budgets limited and opportunities harder to come by, it’s important to make sure that every pound of spend counts. It also emphasises the importance of retaining existing customers as it’s much easier (and cheaper) to maintain an existing relationship than develop a new one.
Operations
The core operations of a company, whether this is the creation of a product or provision of a service, can also be a significant source of losses.
For service-based organisations, project profitability and low staff utilisation represent the next significant areas of profit loss in our survey. Having control over customer projects and ensuring these are profitable can be difficult given the multiple sources of cost and delays in billing, and are a common source of lost revenue.
Conflicts in scheduling team resources and lack of access to financial information make it hard for busy project managers to keep on top of profitability.
Being able to monitor the resource against each project in real-time and ensure KPIs are being met, is essential to the operational profitability. Project profitability will be the difference between just ‘getting-by’ or leaping ahead in the current economic climate. Organisations owe it to themselves to make sure they address such issues that are impacting on the bottom line; it could even be a matter of survival.
Whilst not all businesses are stock-based, but for those that are, the challenges are also clear. Understanding the issues around poor stock availability is a fine balancing act between meeting customer expectations on lead times versus the demands of working capital.
Too much stock and customers may be happy but finance costs increase, too little stock and working capital is reduced but there is greater potential for missed sales due to availability issues.
Getting the stock balance right is all about accurate reporting and understanding the current trends in sales. Having a real-time view of stock and orders will also help organisations keep both the business and the customer happy.
Finance & Business Support
While the finance team should have the greatest control within the company, they need to be able to manage cash and debts, conduct profitability analysis and report on all of this easily. But often (and certainly, it has been the case over the last few years), cash and debt management can be a huge headache for the finance team.
Finance teams may have to look beyond traditional credit control to improve bad debts, such as understanding the reasons behind late payments, which may relate to a customer service issue, or an error in the billing process.
Resolution may require a customer visit from the sales team, a site visit from a consultant or an engineer, or a replacement order, and therefore beyond the traditional remit of the credit controller. Aged debt is no longer the sole provision of the finance function.
Having ‘joined-up’ information, such as access to customer service data, is critical to getting to the root cause of bad debts, and ensuring that processes can be amended to prevent making the same mistakes again.”
Measures to remedy or prevent profit leaks
An interesting point to note is that staff utilisation is not just restricted to those organisations providing services. Many organisations still do not have the luxury of hiring additional staff in the present economic climate, and making the most of existing resources is vital to maintaining customer service levels during what is still the early stage of economic recovery.
The key to remedy or prevent profit leaks is having relevant, detailed and specific information available in a timely manner. Reporting should be the main focus of review and improvement. When compared to what measures ‘could’ put in place to prevent profit leaks, better reporting tools, alongside greater visibility across the organisation are significant measures.
Understanding just how critical reporting and visibility of data is to an organisation is critical and by having access to accurate and timely information provides a better understanding of where opportunities are being lost. If you have transparent reporting on staff utilisation, sales procedures, billing/cash flow, project profitability or stock availability, then you have a benchmark to make improvements. You can’t manage what you can’t measure.
Business management solutions and technologies can play an immense role in addressing such issues, creating workflows that help stem the tide of profit loss through effective savings measures as well as highlighting additional profit opportunities. Providing increased transparency, employees across the business are also empowered to make more efficient use of resource, ranging from their individual time to cost control. In effect, everyone has a part to play in the success of the business.
While it does involve implementing new ways of working, the benefits to each individual and the organisation will be significant, including streamlined project control, improvements to the sales pipeline and the provision of better reporting tools. It also means that everyone within the business becomes accountable. Having measures in place to encourage direct responsibility, wherever possible, focuses efforts on what every single person in the organisation is there to achieve.
Having access to real-time information and analysis can also help to spot interesting trends, which could be the source of additional opportunities. Not only will this help to have a positive impact on the bottom line, but organisations will be able to provide a more efficient and valuable service to customers too. What’s more, despite some level of investment, these long-term benefits can be measured. Through integrated, business management solutions organisations can be assured the improved visibility will successfully reduce losses and increase profits, providing the stability they need to survive in any economic climate and enjoy a prosperous future.