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As a small business owner myself for six years, I probably failed to appreciate how many ways that carelessness nibbles away at your profits. Going out on 130 consulting jobs with small businesses, I had to find savings to justify our being there. That requirement helped me really tune into finding waste and calculating out what the effect was over a year.
Interestingly, it wasn't as hard to find as you might expect. Sometimes my co-workers and I found it just by watching what was going on. Other times, we found out about the waste by talking with the employees. The third source of information was from experience and knowing what to look for.
Here are three minor ways that your inventory can shrink in value because they add up quickly:
- Tools left behind
- Scrap that was useable that was tossed out
- Fixtures, hardware not cared for and accounted for
Small Business Owners and Managers Tend to Under Value the Impact
The funny thing is that even small business owners and managers tend to under value the impact of these small losses because they compare the shrink to their sales rather than to their net profit. Very few small businesses, especially in their first few years in business, are making a profit over 5%. A lot are struggling trying to overcome a loss. A huge percentage of small businesses are fortunate to make a 2% net profit - before taxes.
Your employees are seldom concerned about what they see as the little things. Most employees of small businesses tend to think that the owners are rich. After all, they own a business that brings in $500,000 to even $20,000,000 a year.
While there are small businesses that are smaller than this, they usually were too small to afford a consultant. There are ones larger too, but this size range covered most of the ones I worked with.
Small Business' ProfitsTo really appreciate how much a small amount of shrink can add up, look at this example from a construction crew or service crew, like plumbers, electricians, or HVAC technicians:
- Company annual sales: $1,000,000
- Net profit percentage: 2%
- Net profit: $20,000.
Example of the Effect of Even Small Daily Losses
- Hammer $25
- One tool left behind by someone daily = $125 loss per week
- Fifty weeks = $125 x 50 = $6,250
Most people look at that amount of waste as 0.6% of the company sales so no big deal, right? However, ($6,250 / $20,000) = 31.25% of your net profit
Admittedly, it's unlikely that you will have your crews lose five hammers per week. However, losing $25 in tools, parts, hardware, and scrap that could be used instead of a new board or piece of wood is realistic from what I have personally seen at numerous clients who have crews in the field. After all, some tools and parts cost to more than $25 so this example could be conservative.
How to Get Your Employees to Help
There are various ways for you as a small business owner or manager to incentivize your crews to care. Keep in mind that everyone operates to some degree from self-interest, i.e. "What's in it for me?" While the means to make them more concerned are largely limited by your imagination, here are a few ideas to get you started:
- Share with the foreman and crew members an example of the impact their attention to detail has on the company. Your ability to make a profit affects how long they will be employed.
- Develop a profit sharing plan where all employees share in a percentage of the net profits after taxes. Before you get carried away, remember that your investors want a return and you need profits to fund growth and to reassure your lenders that you run a solvent business.
- Share with them the gross profit on a specific job. Subtract any unplanned costs, like lost tools and hardware and excessive waste. Then pay a bonus as a percentage of the gross profit achieved. You might even use a tiered percentage based on how close that came to your planned numbers.
Making a profit with a small business requires attention to detail. It's amazing how little things add up. This is why having a budget or planned profit is so important. When your numbers are off, you can look to see what is nibbling away at your profits. Then develop a plan to get back on track quickly. As most employees think you are rich, they are not as motivated as you are to care about the net profit. Give them a reason to care and you will see your profits increase.
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