Eight ways to boost your bottom line.
By Bill Lynott
Profit leaks lurk deep inside almost every service business, silently draining off hard-earned dollars. Some are harder to detect than others; some are far more damaging than others. Together, they can form a major obstacle on the road to optimum financial performance. Here are eight steps you can take to smooth out the path to a consistently healthy bottom line in your business.
1. Mind the accounts receivable
If you do any of your own billing, you must maintain good records of how much money your customers owe you. Whatever system you use to keep track of accounts receivable (AR), it must be capable of telling you whether any accounts are overdue by 60 days or more. If that comes to 10 percent or more of your total AR, you need a more aggressive collection policy.
“The more casual you are about collecting the money owed to you, the more casual your customers will be about paying you,” says Terry Simpson, American Tent & Awning, Indianapolis, Ind. “The best way around that problem is to ask for cash in advance. Because we do that, our accounts receivables are pretty clean.”
Shari Graye, Great American Tent Co., Gardendale, Ala., agrees. “We’ll extend 30-day credit to corporate accounts with a credit history. However, for weddings, individuals and companies with no credit history, and out-of-state clients, we ask for payment up front or at install.”
2. Manage your cash flow
Collecting what is due you is only part of the job. How you manage the revenue generated by your business will have a great influence on how much of that money finds its way to your bottom line.
Profitable management of cash flow calls for never allowing any of your money to lie idle. The worst place to deposit your daily receipts is in a low-interest or no-interest checking account. Instead, open a money market account at your bank and have it linked to your checking account for telephone or online transfers. Deposit your daily receipts into the money market account where they will immediately start drawing interest.
Keep a minimum balance in the checking account and transfer cash by phone or online only as needed to cover checks written.
3. Pay bills only when they’re due
Ever notice how checks are slow to come in from people who owe you money? That’s because hanging on to cash as long as possible keeps that money available to draw interest or to work in a business.
Set up a system that provides for paying bills only when they’re due. Don’t jeopardize your credit standing by paying bills late. Pay your bills when they are due—not before, not after.
4. Make use of available technology
“We use a rental program called Party Track, which helps us in all aspects of our operation,” says Mike Gould, Christian Party Rental, Hollis, N.H. “It helps with inventory control, rental contracts, loading sheets, AR, etc. It makes paperwork much easier than in the past.” According to Gould, one of the program’s major advantages is that it’s simple to use.
“Regardless of what software you use, it should do two things to advance the business,” says William Pretsch, Mahaffey Fabric Structures, Memphis, Tenn. “Eliminate over-bookings (which lead to expensive sub-rentals, or worse) and provide accurate ROI data by product. For example, if your company has ten 20-by-20 tents in inventory, should it really have twelve or only eight? Accurate information here can help guide your investment decisions.”
Among other money-saving technology tools that you may want to investigate are online banking and bill paying.
5. Hire with caution
Yes, finding good employees is more difficult than ever. Still, your staff is the cornerstone of an efficient and profitable operation. A single employee functioning at less than optimum and honest levels can wreak havoc on your business and on your bottom line. At the very least, check all references and do a search on criminal convictions (not charges) before hiring. If you have any doubts or unanswered questions, don’t hire that person.
“We always check with former employers,” says Simpson. “It’s not a foolproof system, but it has helped us to avoid hiring the person.”
“Don’t delegate calling to check references,” says Pretsch. “As a business owner, it is critical to check them yourself. Frequently, owner-to-owner conversations are more frank than conversations with an HR professional.”
Increased turnover is only one of the problems generated by hiring the wrong person. A personality that isn’t comfortable in your environment can harm your business in ways that are far less obvious.
6. Be aware of human weakness
Despite the best pre-hiring screening or the length of service of trusted staff members, human susceptibility to temptation is inevitable. Your inclination may be to trust the people you know, but you should still take action to reduce the chance of losses due to dishonesty or carelessness.
Deposit receipts daily. Make no exceptions. Create a paper trail for every transaction in the business. Be especially watchful over the system for handling petty cash. This is where embezzlement usually begins.
“Employee theft of material is not really a problem for us,” Graye says. Employees who stretch their hours or park for two-hour lunches are a more serious concern, she says. To help control this, Great American Tent installed electronic monitoring devices on some of the company’s trucks. The devices indicate the truck’s location and schedule. Graye says abuse of payroll is potentially one of the most costly profit leaks for Great American Tent.
7. Take action on marginal employees
Discharging an unproductive or disruptive employee is the sort of unpleasant task that most business owners dread. However, failing to take action when necessary can be a costly mistake.
“Once we learn that an employee has been dishonest, we terminate him or her immediately,” says Simpson. “We provide each new employee with a list of unacceptable behavior. Dishonesty and lying are prominent on that list.”
Keeping a problem worker around to create more trouble makes a bad situation worse. That’s not fair to you or to your other employees. It can result in added stress on other employees who may have to take on more work, as well as dissension among those who can’t understand why you are keeping the employee on your payroll. This, in turn, can negatively affect the treatment of your customers. Once you identify a disruptive or unproductive employee, it’s best to face up to the unpleasant task of terminating the relationship. Postponing it can only lead to a more serious problem later on. Pretsch sums it up this way: “Hire slow, fire fast.”
8. Watch that depreciation
Failure to take advantage of the rules for handling depreciation can result in a major profit leak. Consult with your accountant to ensure you’re doing it right. “We expense items under $500,” says Simpson. “For things like big tents or vehicles, we spread depreciation over three to five years.”
“Our depreciation philosophy at Christian Rental is simple,” says Gould. “We depreciate as quickly as legally allowed.”
While it may not be possible to eliminate every profit leak in your business, following these eight operational techniques can help mitigate any unnecessary losses. When it comes to profit leaks, Graye says she likes to think like industrialist Andrew Carnegie: “Watch what comes out of the bottom of the barrel, and you won’t have to worry about filling it up.”