What are money leaks and how are they affecting the profitability of your operation?
Money leaks are small ways that business expenditures are wasted. These leaks cause unnecessary profit loss and require an organization to generate more revenue to compensate. In a recent chat for USA Manufacturing Hour on Twitter, host Adam Baker from Schooley Mitchell in Pennsylvania led a discussion about ways to eliminate money leaks and increase profitability.
Worst Business Purchase
The discussion began with people introducing themselves and sharing their worst business purchase or expense story.
Dave Meyer from BizzyWeb in Minnesota said, “My story is this: I have a friend who did a "groupon" promo for her spa/salon business. The deal was for half off a massage - $75 for a $150 session. Groupon takes half of the cash, so she was down to $37.50 per sale, which cost $75 in labor. Sold 200 - lost $7500.”
Nigel T Packer from PelaTis Online in Wales, United Kingdom said, “I once did a review of Oxyacetylene rentals for the company I was working for. They were paying monthly rental on 73 sets. When I went around the works I could only find 18 sets. We cut a considerable amount of money from that bill.”
He added, “When I went through the records they had been paying over ten years. The missing sets had been returned to BOC but they had not removed them from out account.”
Host Baker said, “My worst purchase story: In a prior organization we had a closet full of brand-new TVs that we never used. This was “Use it or lose it” budgets incentivized wasteful spending.
What the Heck is a Money Leak?
The discussion then turned to what a money leak is. Participants shared their thoughts.
Julie Basello from Radwell International in New Jersey said, “I would think a money leak is an area in an operation where money may be wasted unnecessarily.”
Host Baker said, “For sure - it's just dripping out with no end in sight!”
Dan Bigger from Optessa Inc in New Jersey said, “Spending money on things you don't use or get at a reduced rate.”
Host Baker said, “I won't let my wife see this answer - she'll say our garage is full of money leaks!”
Gina M. Tabasso from MAGNET in Ohio said, “Costs that add up and suck you dry.”
Host Baker said, “For sure...it's like death from a thousand cuts!”
Kristina Harrington from GenAlpha Technologies in Wisconsin said, “Cash that is going out the window that no one is measuring or managing.”
Host Baker said, “Exactly!”
Kati McDermith from Industry Net in Illinois said, “Money leak would be anywhere you are loosing money and might not know about it!”
John Buglino from Optessa Inc. in New Jersey said, “Unlike the money gone to support my LEGO collection, a money leak are costs incurred without knowing.”
Host Baker said, “LEGO blocks are an investment!”
Neil Hussey from Denco Lubrication in the United Kingdom said, “What I have when the wife gets hold of the credit card after pay day?!!”
Velavu in Canada said, “Costs that add up over time. Looping it back to what we do, when businesses don't track their assets efficiently, that's a money leak.”
Tod Cordill from Moderno Strategies in Oregon said, “A boat?”
VirtuDesk said, “Sample illustration: Buying a block of ice. When you buy a block of ice, you don't get to consume it all because some part of it already melted on the way.”
Ruby Rusine from Social Success Marketing in California said, “Money leaks can erode an organization's profitability, which can eventually lead to layoffs and other cost-cutting measures that can impact employees.”
Packer said, “Slow overlooked spending that drains essential revenues and capital. I downsized 8 years ago and started working from home. I reduced my overhead by 80% and I am a lot less stressed.”
Host Baker said, “Money leaks are ways that businesses unnecessarily lose profit. This includes unknowingly paying for services they don’t want or need, paying for unidentified errors on their bills, not having their services optimized, or paying rates higher than they should.”
He added, “Businesses know how to identify & respond to "Burst Pipes" (costs they know they have to address - labor, material, etc.). "Money leaks" persist in an organization because businesses lack the time to address them or the knowledge to recognize them.”
Why Care About Money Leaks?
The discussion then turned to why every employee, and especially sales employees, should care about money leaks.
Chris Giglio from MFG Talk Radio in New Jersey said, “Is it because of how much this money actually affects the bottom line of a company, which also impacts employee salary and projected earnings?”
Tabasso said, “They add up and eat into profitability. We are supposed to be good stewards of our business.”
Buglino said, “A money leak can get out of hand quickly Stop the leak to save the business.”
Bigger said, “The more money the company can save from waste can be used on things that will move the company forward, create jobs and growth.”
Meyer said, “The more profit you retain, the less pressure on sales to sell more (and you still make more cash!)”
Kaia from Strat Mg in Illinois said, “We're all in the same boat together. When there's a leak it affects everyone.”
McDermith said, “Because a penny saved is a penny earned.”
Whitney Koch from Welker, Inc. in Texas said, “The more leaks there are, the less money your company has for budgets and payroll.”
Velavu said, “Saving money = more opportunity to invest in the growth of the business, operations, and more.”
VirtuDesk said, “Because everyone is part of the company and should care. Imagine using an entire rim of tissue paper in the comfort room when they can actually use 2 plies only? That could have save money in buying tissues.”
Hussey said, “Because it ultimately impacts on the bottom line and that affects everyone.”
Pavel Stepanov from VirtuDesk said, “When your people care, you can save money. The added savings can be used to grow your business, increase your employees' salaries, produce more job opportunities, and save the economy.”
Emily Kite from Obsidian Manufacturing Industries, Inc in Illinois said, “Out of my element here, just here for the knowledge!”
Jim from Zero Surge in New Jersey said, “Early in my career it was pointed out that my time can be a money leak. Don't waste 5 minutes saving a paper clip that costs $0.01 to replace (of course minus environmental costs but this is just the example that popped in my head).”
He added, “On the flip side, automation can be a money leak if not properly fit in with a process. If a $5 hand tool is just as fast, no need to get a $50K machine.”
Matt Long from Aviate Creative in New Jersey said, “Company instability leads to job insecurity If there are actions that employees can take to minimize this insecurity, it's in their interests to do so.”
Missy Moorefield from Southern Fasteners & Supply, Inc in North Carolina said, “Money saved from any leaks can be used for raises/bonuses/other morale boosts within the company. Also, I would think that money leaks could cause a company to (possibly) eventually go bankrupt.”
Host Baker said, “Every dollar wasted in an organization requires more money in generated revenue. A portion of annual sales is being used just to cover money leaks.
He added, “Plugging these holes makes revenue generation less stressful and more impactful to the bottom line.”
He continued, “Money leaks are like running the A/C with the front door open. Is the A/C making a difference? Sure, but it's working a lot harder than it would if you shut the door. How much harder are you working because of money leaks?”
Paperless Billing and Auto Payments
The discussion continued with participants sharing why they think essential services vendors (utilities, telecom, shipping, fuel, etc.) promote paperless billing and auto-payments. Participants shared their insights.
Moorefield said, “Less waste, less overhead, convenience.”
Jim said, “You are making me the contrarian today. Auto pay is where fraud lives. You still need to oversee payments and look for fraud and errors. Also, when there is a problem (we have issue with an auto invoice portal), they take forever to fix the problem.”
Koch said, “I would guess people don’t review electronic statements as closely (if they review them at all), and it saves them postage & handling.”
Stepanov said, “Because it's economical and cost-effective. Imagine how many trees were cut just to create a rim. By going paperless, you are able to save those trees and save money for your company.”
Buglino said, “To hide their price increases 'Save $5 when you go paperless' ::checks bill:: new $5 useless fee for I don't know added.”
Bigger said, “So they don't have to mail them bills = Savings in cost to acquire the money.”
Meyer said, “Easy peasy, b/c it's cheaper for them (and better for the environment too!) Lower handling costs, no printing costs, no postage - and it's how people want to pay bills now.”
Kaia said, “Good points! It's so true that many people (and companies) prefer the traceability and convenience of online bill pay! And the environmental benefits also provide a win for company and customers and all of us! Cost savings from reducing labor (automation), materials (printing, paper, envelopes, etc.), and postage.”
Hussey said, “Many reasons but my choice is for Environmental reasons and saves time having to physically mail them out.”
McDermith said, “Outta sight, outta mind! If you can't see the itemized bill, you don't know what you're being charged for.”
Rusine said, “Mailing distribution and handling services can add up. Auto-pay is likely lesser.”
VirtuDesk said, “Because papers are just a mess in the office. It's more efficient and cost-effective to keep your payment records digitize.”
Packer said, “There are many times when we need to produce a utility bill for identification. We have a no print policy in our office. I have a printer cartridge that I bought in 2015.”
Kite said, “With paper copies I am sure people don't look or even look as closely as they would if it was electronic. Especially with everything going electronic.”
Amy Anderson said, “Still as a customer who has been involved in these printing/billing systems, I know the company can print cheaper than I can, and I still hang on to the desire for the piece of paper.”
Cordill said, “There are many reasons for paperless billing: 🗸 Reduce costs (printing, mailing) 🗸 Reduce data handling 🗸 Consumer preference 🗸 Sustainability initiatives 🗸 These days - paper supply chain issues.”
Host Baker said, “Vendors are conditioning you to pay without verifying services or cost. They create additional steps for YOU to hold them accountable but fewer steps for THEM to get paid.”
He added, “Because we are busy, what we automate, we tend to rarely review. Your vendors know that.”
He continued, “Breaking News - Employees have more tasks and less time! If vendors can make it easy for companies to pay them, yet hard to monitor them, they know that their bills will be questioned less frequently because employees don't have time. Out of sight, out of mind.”
Monitoring Invoices
Participants were then asked why companies should invest time in monitoring their invoices from their essential services vendors.
Koch said, “So they ensure they’re only paying for the goods/services they actually received.”
Bigger said, “Question everything and try to get reductions. There should be a department that does this. This is how the auto industry works.”
Nicole Donnelly from Donnelly Marketing Group in Virginia said, “Because it's not uncommon to find errors! Happens to me all the time with medical bills....”
VirtuDesk said, “That's where you'll find out money leaks!”
Buglino said, “Easiest way to lose money as the rates fluctuate month to month.”
Hussey said, “To make sure they’re only paying for the services they use and that the bills are correct. Also to be able to check to see if the services can be git cheaper elsewhere.”
McDermith said, “To find the holes and stop the money leaks!”
Kite said, “To make sure they know what things are being charged. If you don't have someone monitoring, companies could be adding services fees etc without you knowing.”
Long said, “TO STOP THE LEAKS!”
Jim said, “I look at cost as a percent of revenue. It helps to see if costs are rising or if they are important. Some services are a pain to change. Was forced into a bank change that wasted two weeks solid time (had to redo all of the auto payments)”
Velavu said, “It's critical to the success and survival of a company! Staying on top of invoices ensures everyone is getting what they are owed and can be a helpful tool for balancing a company budget.”
Kirsten Austin from DCSC Inc. in Missouri said, “Sometimes, companies may honestly over-charge by accident. It's not always sinister, but it's also critical to keep as much money in your operating accounts for important things! You know payroll, over-head, marketing, innovations, and improvements.”
Packer said, “With Online Banking I am able to see every payment and income each day. I can see when an invoice has not been paid and act on it. Technology can be very useful.”
He added, “Negotiating is an important part of the purchase process. What should always be remembered if you flit from one company to another chasing the lowest deal, eventually you will run out of suppliers. Never building a relationship.”
Host Baker said, “Invoices uncover money leaks. In a recent survey, over 80% of telecom bills had undiscovered billing errors (BTW, rarely do vendors advise you of errors).”
He added, “Additionally, without reviewing bills, you never question the rates, terms, or services you are paying for.”
He continued, “Is your company awesome? Has it ever made a mistake? I'm sure the answer is "yes" to both, and no matter how awesome your vendor is, sometimes they make a mistake too - but it's up to you to notice and correct it! Mistakes can go unrealized for years!”
Plugging Money Leaks
The discussion concluded with participants sharing some great ways to plug money leaks.
Bigger said, “Review everything, hire someone to do this work, like Adam.”
Buglino said, “Pay attention, ask questions...lots of questions.”
Stepanov said, “The best way is to watch your spending and go paperless.”
Chase Bodor from Plastics Plus Technology, Inc in California said, “Audit your spending and find those "dead money" zones. Make the dollars you do spend work for you, not against you!”
McDermith said, “Write a strongly-worded email (this is also one of my hidden talents)”
Velavu said, “Finding ways to track and monitor everything at once. More visibility = more control.
Meyer said, “My favorite: Just ask. Negotiating and revisiting contracts is a fact of life.”
Long said, “Regularly review any areas of the business that pose threats to money leakage, such as advertising, subscriptions, staff (theft, + morale), and vendors.”
Kite said, “Designate someone specific for this task?”
VirtuDesk said, “Examine your bills and watch where you spend your money.”
Hussey said, “Track, check, question, question, question, double check, negotiate…”
Koch said, “Have departments to closely review invoices to ensure the align with goods/services purchased. Regularly review services like utilities and see if you can negotiate or find a lower rate.”
Host Baker said, “The answer is simple, but not easy - you have to make the time to do it. You could be amazed by the results!”
He continued, “Ways to plug money leaks include:
Negotiating with vendors – both rates and terms
Auditing your services – do you know what you are paying for?
Monitoring your invoices – what you don’t know DOES hurt you
Outsourcing the effort – most companies don’t have the time or knowledge to successfully plug the leaks.”
He added, “Now go check those invoices and plug those leaks!”
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