Identify Profit Losses to Increase Cash Flow and Profits

The Mayo Clinic states that “coronary artery disease is the most common form of heart disease and the most common cause of heart failure.” They go on to say that “the disease results from the buildup of fatty deposits (plaque) in your arteries, which reduce blood flow and can lead to heart attack.”

In business, the equivalent to coronary artery disease is the buildup of profit losses through mistakes, inefficient operations, and waste.  Every squandered dollar reduces cash flow and leads to complications caused by business cardiac arrest.  As these waste dollars accumulate, it robs the business of accrued profits, and more significantly, it reduces cash in the bank by every dollar lost.

If, after a month, quarter, or even worse year, your business lost money as reflected in the business profit equation below, you own a business in trouble.

You correct for profit losses the same way you can reduce the chance of having a heart attack by taking management action to make the necessary changes before it’s too late. Start with reducing expenses,  addressing inefficiencies, and ending unprofitable habits that lead to profit loss buildup and declining earnings.

Five critical concepts to better understand to overcome small business profitability issues:

• The key to consistent profit growth lies in always to be fixing your #1 constraint.
• Increasing business profits comes down to behavior change for everyone in your business.
• What’s the best way to identify where profits are being lost?
• What are other benefits beyond better cash flow and higher profits from stopping profit losses?
• How to ensure corrective actions will take effect and stay in place.

The key to consistent profit growth lies in always to be fixing your #1 constraint.

The key to consistently growing profits is to resolve the #1 constraint impacting business profitability.  Step 4 of B-CPR details the process used to stop your business from “bleeding” out cash and, ultimately, profits.

Profit losses encompass business issues, waste, poor productivity, failed actions, and missed profit opportunities that cost you money.  These losses typically manifest as lost sales or unnecessary expenses that should have been avoided that you now get to pay for out of profits.  The key to this fourth step for avoiding business cardiac arrest is to identify and quantify the actual problem costs and opportunities lost in the business based on their calculated profit impact.

Below is a visual showing how difficult it is every day to convert a lead into a sale into cash then profits:

Not only are there multiple things that go wrong any day.  Each thing that does go wrong increases the potential for waste and inefficiency that costs you money.  Every time you lose money, you are driving up costs that cost you profits and cash.

Increasing business profits comes down to behavior change for everyone in your business.

Increasing business profits is much more than creative accounting exercises.  Growing profits encompass behavior changes that result in your business performing differently through your continuous execution of BusinessCPR™  Step 4—Stop Your Profit Losses that Keep Your Business at Risk.

Unwanted profit losses restrict the flow of cash through your business.  So it makes sense that ending these losses is the most effective way to ensure that your business makes and holds onto more money.   And it’s easy to confirm your success in making and sustaining the changes that stop your profit losses.  You’ll see increases in weekly cash on hand levels and improving monthly profit results.  This will end you’re even asking the question, “Why is my bank balance so different than my reported profits?”

What’s the best way to identify where profits are being lost?

The most efficient way to identify and quantify profit losses is by following B-CPR Step 3—Confirm Your Profit Quality.  B-CPR Step 3 examines leading and lagging metric “misses” and unfavorable variance results.  It isn’t enough to identify where you are losing money; you need to quantify each profit loss, so you can prioritize which loss to stop first, based on its impact on your cash quality.  This begins with a close look at the areas of your business managed in B-CPR Step 1—Increase Your Operating Cash Velocity.  And then, move on to the areas subsequently measured through BusinessCPR™  Step 3—Confirm Your Profit Quality.

Once you have prioritized what to “fix” in your business, you are ready to establish your who, what, and when.  The key is to focus first on the “who.”  No problem in your business can be effectively addressed until you establish who is accountable for fixing it.  Assigning a specific person to own what needs to be done by when is required if any problem is ever to be fixed.

You will know that you have stopped a specific profit loss through your B-CPR Step 3 variance reporting the next month after the loss is stopped.  You confirm you have stopped the loss when you can see the value captured from stopping the loss reflected in your weekly cash management, the core component used in B-CPR Step 1—Increase Your Operating Cash Velocity.

What are other benefits beyond better cash flow and higher profits from stopping profit losses?

The obvious benefits of B-CPR Step 4 are higher business profits and greater cash flow from operations.  The less noticeable benefit comes from identifying, quantifying, and resolving the most critical issues impacting profitability and cash flow.  Through this B-CPR step, you gain the kind of keen team awareness built by fixing a prioritized problem—one that has been creating stress for you and your team and costing your business money.

Profit losses create unnecessary costs, and until they are fixed, they continue to waste cash and drain profits.  Your employees likely know already where waste, inefficiency, and losses are occurring.  They know that these inefficiencies often make their jobs much more complicated than necessary.

By establishing your “fix” priorities, you set quantifiable goals to confirm whether and when the problem is fixed. By fixing the prioritized areas in your business, you measure progress on an hourly, daily, weekly, or monthly basis.  Remember that the sooner you measure things, the easier it is to fix the problem and confirm that it stays fixed.

There is another benefit to consistently following B-CPR Step 4.  Participation in the process creates urgency, buy-in, and focus on the critical few issues that must be corrected to stop profits from leaking out of the business.  Throughout this process, issues that employees, including managers, want to see fixed are dealt with, resulting in less pressure and stress across your company in the long run.

Beyond seeing higher profits, more cash in the bank, and less-stressed employees, it’s ultimately your customers who benefit.  These customer benefits come in several ways: from engaged employees efficiently performing their jobs to improved delivery of your products and services, providing a better customer experience.  When you eliminate waste, inefficiency, and delay, you ultimately provide a higher value-to-cost ratio for every customer.

Keep in mind that no customer will pay for your mistakes, nor should they.  They are willing to pay you a profit markup, but they won’t do so at their own expense because you fail to stop your business’s profit losses.

How to ensure corrective actions will take effect and stay in place.

After a needed change has been identified, quantified, measured, and assigned, it must be started.  By understanding the costs associated with a problem they are being asked to fix, those impacted will be much more engaged in making the necessary changes.  As a result, their desire to resolve the issues that are holding you back from improved profit and cash flow will result in new and improved efforts.

The following are the core objectives from acting on BusinessCPR™  Step 4—Stop Your Profit Losses:

1. Focus efforts on quantifiable high-profit loss issues, not just annoyances.
2. Maintain a high sense of urgency for working through the difficult problems causing profit losses.
3. Obtain a high commitment from participants to make the required behavior changes to sustain the profit loss fixes.
4. Ensure a safe environment to discuss the next hard truth so that continuous improvement becomes the norm, not the exception.
5. Increase business value through increased efficiencies, as reflected in higher profits and more cash in the bank.

Use this proven business-improving process to focus both you and your management team.  Through this management process, you will change your priorities from “tasks” to “CASH” and subsequently to “PROFIT” by identifying what specific actions each of them needs to take to improve results.  You can ensure that your team does what needs to be done by measuring their progress through your B-CPR Step 3 scorecards during your B-CPR Step 5 weekly management team meetings.

Do you want help identifying where you are losing money?

If working through your profit plan and historical financial data seems exhausting, click here to learn how a certified BusinessCPR™ Business Scientist can help you identify by B-CPR step where your business is losing money:

Within three days of receiving your financial statements by month, you will be emailed a sampling of the most common profit loss mathematical equations by B-CPR  step using your data.  Your business-specific results will show you how much money you cost your business by not applying the principles of the BusinessCPR™ Management System to your business decisions and actions.