Unless you’re accounting for these hidden costs, your business is not as profitable as you think.
Very few businesspeople genuinely believe that their companies are not profitable – losses are attributed to ‘a rough period’, investments to gain market share, and a string of one-off items that impact on the bottom line. The problem is that one-off items add up, and failing to account for a company’s entire cost base is a fatal flaw.
If your business is not really profitable, then you’re better off knowing as soon as possible: you can then take action to correct the situation, or wind down the business before it’s drowned in debt. So, if you’re not already taking heed of these costs in your internal calculations, you need to look at your books with fresh eyes.
It’s astonishing how many firms effectively live on their overdrafts while ignoring the impact of interest and bank charges on their accounts. Similarly, servicing more long-term debt becomes one of those invisible costs that far too few entrepreneurs keep in mind. If you used credit to start the business, that’s costing you money today, and the interest repayments need to be considered in your regular plans.
Extraordinary Labour Costs
How often do you have staff pulling a ‘sicky’, or being genuinely prevented from attending work, leaving you forced to pull in cover at short notice? Many businesses treat these situations as one-off, extraordinary occurrences, but they happen often enough to make a real impact on profitability. You need to account for the extraordinary labour costs that arise when an employee takes annual leave or a sick day. If you’re not budgeting for an employee’s full leave entitlement, then you’re storing up problems for your business.
Every business allows for equipment depreciating when calculating their tax liability, but far too many small companies don’t allow for it from month to month. Based on your business’ experience to date, or your own knowledge, build a contingency for replacing equipment as it becomes outdated or unusable into your regular budgets. That will save you from a major cash-flow problem when a key machine or vehicle breaks down, and again give you a more accurate picture of your profitability.
Crosshead: Bad Debts
Almost every business has bad debts that they know about: the customer who cannot (or will not) pay up what they owe despite repeated chasing. But many bad debts are more insidious than that. If you’re running a cash business, those nice customers who are caught ‘a bit short’ and given a discount by necessity are usually more common than you’d like. And if you’re repeatedly chasing some clients over outstanding invoices, you need to consider all those man-hours seeking payment when you’re evaluating whether that business is profitable.
More broadly, you also need a true picture of the hours that go in to serving each client. Aside from the products or services you’re delivering – and their cost to you – are you accounting for the hours spent on meetings, phonecalls and other time-consuming activity that’s crucial to keeping the client happy? Unless you’re accounting for every cost associated with a client, you can’t really say whether they’re worth keeping on.
In some cases, adding all these items to your monthly cost calculation will send a shiver down your spine: that’s no bad thing. If you’re lucky, you’ll be able to identify one or more facets of your business that aren’t profitable, allowing you to cut them out and move forward with confidence. Even if you’re forced into a more fundamental rethink of your business model, you’re better off confronting your costs head-on now rather than ignoring them until a situation becomes critical.
At DCA, we advise many companies that are trying to gauge their own profitability, improve how they do business, or even turn things around. We’d be happy to help you with an initial, no-obligation meeting. Simply contact us to get started.