My guarantee, if you follow the steps in recent blogs, and illuminate the dark recesses of your business through having relevant, detailed information available in a timely manner, you will identify profit leaks you can plug. That’s a good start to getting a better business.
There’s one more tool you can use to pin down those troublesome profit leaks that are restricting your freedom, and forcing you into those long hours at work; a tool that good businesses use to keep getting better.
You have only been looking at yourself so far. What if other businesses in your industry are doing better? They may be more profitable overall, or they may be doing better in particular areas; for example, Gross Profit per owner or per employee, Sales or Gross Profit per square metre, per vehicle, per completed job, per guest room, per dollar of stock; day’s debtors outstanding, day’s stock on hand; hours worked per owner.
Turning a blind eye to performance indicators in your marketplace, particularly when seeking to grow a sustainable business, is not a good idea.
Very few small business owners and managers take note of and study all the successful businesses in the same or related industries that they can. It is really worthwhile trying to determine what they are doing that makes them succeed, both in terms of their general approach and in specific things they do.
The tool you use to do that is called “benchmarking”. Regular reporting and benchmarking can reveal profit leaks that have been hidden away, holding you back and causing you to work harder and longer to no avail.
Have you benchmarked your business? Do you know how your performance compares to averages in your industry?
Naturally Wikapedia has a definition, one that encompasses (with my emphasis) the full range of benchmarking practices:
“Benchmarking is the process of comparing the business processes and performance metrics including cost, cycle time, productivity, or quality to another that is widely considered to be an industry standard benchmark or best practice. Essentially, benchmarking provides a snapshot of the performance of your business and helps you understand where you are in relation to a particular standard. The result is often a business case and "Burning Platform" for making changes in order to make improvements.
Benchmarking is most used to measure performance using a specific indicator (cost per unit of measure, productivity per unit of measure, cycle time of x per unit of measure or defects per unit of measure) resulting in a metric of performance that is then compared to others.”
Note the reference to “industry standard”. Knowing how your performance compares to your own industry is important. Finding that you are behind the average is a great spur to improving your performance, as is the desire to compare to the best in your industry. I regularly benchmark my clients to help them improve their profitability.
But if you really desire to perform to the highest possible potential then you need to go further. It can be a mistake to limit your comparison to your own industry. The way businesses run within industries tend to be the same pattern. They do the same things the same way. So you can improve your operations to compare to the best in your industry, but it may be that other industries have a different and better way of doing things.
Benchmarking adds a deeper level of insight into what you measure. If you don’t measure you don’t know where to improve. If a similar business is doing better either overall, or in specific areas, then there is a performance gap, and that performance gap is a profit leak, profits you could be earning but are not.
To quote one client whom I benchmarked as part of a Business Diagnostic “The Business Diagnostic showed us that whilst we made a profit, other businesses in our industry make a bigger profit with less man hours.”
Of course benchmarking requires access to industry data, so where do you get it. Well, that might depend on where you are.
In Australia some banks provide broad benchmarking data and you don’t necessarily have to be a client to take advantage of the data. For example the ANZ bank’s website under Small Business/Tools provides some tools.
For more detailed benchmarking information try FMRC (http://www.benchmarking.com.au).
“Business owners and managers will know how their business is performing relative to similar businesses. Industry Profiles and Small Business Analysis equip owners and managers with a road map for profit improvement. By analysing the best performing businesses in every sector we are able to advise all business what they could do to match and better their contemporaries.”
You can access this directly or your accountant may subscribe to this service and offer to benchmark your business and analyse the findings for you.
US and Canadian businesses can access industry data through Sageworks (www.sageworks.com) which offers industry comparisons through a product called ProfitCents:
“ProfitCents is a web-based tool that takes financial data and quickly converts it into plain language reports complete with industry comparisons, ratio analysis, trend analysis, and even expectations.”
Again that is also offered both directly and through accounting firms.
There may also be industry data available through banks and other sources. I would be surprised if there wasn’t.
Good businesses keep getting better. They do so because they are continually looking to benchmark themselves other businesses, not only in their industrybut also against those who perform well in other industries.
You can do this! Plug another profit leak and build a better business.
© Copyright 2013 Adam Gordon, The Profits Leak Detective
Some profit losses are pretty obvious - so you fix them.
BUT, what if you don't know profits are leaking, cash out the door?
Possible leaks could be anywhere.
Are there some clues or symptoms that are tell-tales?