All businesses strive to make a profit, but not all of them succeed. Unmonitored (or mismanaged), your business can go from making money to losing it in the blink of an eye — and stay that way until you step in and fix it. But how does this happen? As it turns out, there are several ways that the typical business can lose money. No matter what particular industry you are in, being on guard against these common sinkholes of wasted capital will go a long way toward staying out of the red.
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In many businesses, the first culprit of wasted money is unaccountable advertising. As a business owner, you need to ask yourself: do I know what I’m getting for my ad budget? If you advertise in places like billboards, the sad and frightening answer is most likely “no.” But billboards are far from the only way ad budgets are squandered. The old saying “I know half of my ad dollars are wasted – I just don’t know which half” has served as an excuse for not holding marketing campaigns accountable for far too long.
If you do not currently measure each outgoing dollar in terms of what it brings back, now is the time to start. Advertising is only worth doing if it produces new customers at a profitable return on investment. If all it does is “get your name out there” in some unquantifiable way, stop doing it.
Out Of Control Employee Spending
Other companies lose money because their employees (or even their founders) are spending corporate money excessively. This can take on any number of forms, including:
Expensive restaurant meals
New and unnecessary computer equipment
Paying personal expenses
Taking “loans” from the corporate account
Your employees may rationalize these expenses as being “not a big deal” in light of how much money the company possesses overall. And the longer they’ve been getting away with it, the longer they’ll keep doing it. It’s poor operating practice no matter what, but when times are tough, reckless spending can absolutely doom a business. That’s why it’s on you to stand up and demand that it stops.
No Standard Cost System
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In his book The Great Game of Business, Jack Stack emphasizes how important it is to have a standard cost system. In other words: for every type of cost your business incurs (advertising, supplies, materials, etc.), you should have a benchmark. Without this information, a manager cannot look at an expense and rationally assess it. Lacking any objective frame of reference, the manager can only make an emotional decision about whether to pay it or not.
A standard cost system also permits managers to plan and control costs, prepare budgets and value their inventory. When and if the company loses money, the standard cost system will be your early warning system.
Company credit cards should also be watched like a hawk. It’s very easy to get in the habit of unflinchingly paying whatever a statement says you owe and tossing it into the trash. However, taking a moment to examine your next statement may surprise you. That “free trial” you signed up for a year ago may have been billing you at $50 per month ever since. Your ISP might have “accidentally” upgraded you to the more expensive premium service three months ago without your consent.
Unless you scrupulously examine your bills, all of this “leakage” will just continue unabated.
Poor Profit Margins
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Of course, sometimes the answer to why your company is losing money is blindingly obvious. The problem may have nothing to do with rogue employees or wasted ad money. Instead, it may be the bare, crass fact that profit margins are too low to survive. The fundamental rule of profit-making is selling a good or service for more than production costs. Not every situation allows for that.
What are you paying for materials? What are your competitors paying for the same? What do you sell the finished product for – and what do your competitors sell theirs for? Sometimes, a moment’s honest analysis of the competitive landscape will reveal where you’re falling short (and how to turn the ship around.)
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The problem could also be simple inefficiency. Is your business utilizing the most modern, up-to-date methods of production? Are your employees trained in the latest, most effective techniques? If not, this alone could be the major source of your cashflow problems. Operating at horse and buggy speeds while your competitors drive Formula One race cars is a surefire recipe for bankruptcy.
Conduct a time/motion study of your workplace, aimed at answering the following questions:
Are my employees using work time as productively as possible?
Are tasks being completed in an efficient manner?
Am I getting the most value out of the least cost?