The Silent Profit Killers Lurking Inside Your Business

Key Summary

• Businesses often overlook significant profit drains like unclaimed warranty reimbursements and inefficient inventory management, which can lead to substantial financial losses over time.
• High workforce turnover, stemming from recruitment costs and lost productivity, along with poorly defined processes and unnecessary rework, silently erodes a company's profitability.
• Strategic pricing that avoids undercutting competitors and strict adherence to regulatory compliance are crucial for maintaining a healthy bottom line, as mistakes in these areas can result in severe financial penalties and lost revenue.

Most business owners obsess over increasing sales and getting more customers, but fail to realize where they’re losing money every day. These invisible inefficiencies can be anything from inventory mismanagement to double work, and they slowly crush profits. Finding these “profit killers” is crucial for long-term profitability.

If you’re struggling to make more sales or you’re wondering if there are ways to increase revenue without cutting costs, here are six commonly overlooked ways businesses lose money.

1. Skipping Warranty Reimbursements

In some industries, tracking warranties can be chaotic. But failing to pursue warranty reimbursements leaves money on the table. A perfect example comes from a Cetaris case study on TCW, a company that tripled its warranty reimbursements just by using fleet maintenance software to track reimbursement opportunities for every work order.

When you purchase equipment with a warranty, the cost of covered repairs is rolled into the total price you pay upfront, so it doesn’t make sense to absorb those costs on your own. It’s important to create a system that tracks warranties and alerts you when parts replacements are covered.

To ensure your warranty claims are accepted, keep thorough documentation, including photos, timestamps, and service records. Don’t skip opportunities for reimbursement just because the amount seems small. Each small opportunity will add up to significant savings over time.

2. Inventory Mismanagement

Having excess inventory, stockouts, shrinkage, and poor forecasting will hurt your margins. Customers who can’t get what they need will buy from your competitors, and excess inventory creates unnecessary costs. For example, extra inventory ties up capital and loses value while it sits. And inventory shrinkage cost U.S. retailers an estimated $112.1 billion in 2022 alone, with theft accounting for the majority. Companies that lower inventory shrink rates even just a little bit can improve their margins and reduce storage costs.

Overstocked products tie up cash that could be invested elsewhere and cost money to store. And in some states, business owners must pay tax on all inventory they hold. The more you store, the more it costs. Efficient inventory management directly improves cash flow and profitability.

3. Workforce Turnover and Lost Productivity

It’s estimated that employee turnover can cost businesses 30% to 200% of an employee’s annual salary, including both direct and indirect costs. Here’s how these costs stack up:

• Recruiting and onboarding expenses. Advertising, interviewing, and background checks all cost money. It’s unavoidable, but when turnover is high, these costs are incurred more often.
• Lost productivity during transition periods. Teams tend to underperform when new hires join.
• Knowledge loss. When experienced employees leave, all their undocumented knowledge leaves with them.
• Unhappy customers. When service is inconsistent, customers become disappointed and might do business elsewhere.
• Overtime and temporary labor costs. Sometimes you need to fill the gaps with temporary staff.

In addition to these costs, frequent turnover is usually a sign of a deeper problem. Working to retain your team members can help reduce these hidden costs.

4. Inefficient Processes and Unnecessary Work

Company processes that aren’t standardized or documented tend to waste time and create rework. Sometimes this involves errors that force rework or miscommunications that cause two people to perform the same task. Interruptions and unplanned downtime cause work to pile up, while productivity drops.

You can overcome inefficiencies and lost productivity by automating manual, repetitive tasks and creating systems for everything, especially handoffs and training. Having systems is the first step. Ensuring those systems are efficient will keep workers productive and avoid delays and costly errors.

5. Poor Pricing Decisions

Many business owners mistakenly believe that they need to undercut their competitors on pricing. That’s not true. Don’t try to win in your market by having the lowest prices. You can compete on other things like quality, durability, longevity, features, and sometimes aesthetics.

Another pricing mistake business owners make is offering too many discounts and not tracking actual costs to see if their pricing is profitable.

6. Regulatory Compliance Violations

Some industries are heavily regulated, and the cost of non-compliance is massive. The consequences can include fines, legal penalties, and even lawsuits. While the exact amounts vary by industry and jurisdiction, ignoring legal compliance is risky.

Stop the Leaks to Strengthen Your Bottom Line

To generate higher profits, you need to do more than just sell more. You need to maintain more of what you already earn and plug any leaks you can find. Hidden costs will burn through your revenue and distort your real profits. Identifying and fixing these profit killers is the fastest way to recover money you didn’t know you were losing.

Photo by Jakub Żerdzicki; Unsplash

Connect with an Old National Small Business Banker for more insights to help your business grow.

This article was written by Editorial-team from Under 30 CEO and was legally licensed through the DiveMarketplace by Industry Dive. Please direct all licensing questions to legal@industrydive.com.