Dodging the money pit

Profitability guru Julia Bickerstaff is one of our favourite bloggers here at SmartCompany. So when she tweeted yesterday about an article called “40 ways small business owners waste their money” I had to have a look.

There is some great stuff on the list, which was generated by a US site called Under30CEO. The publication asked a range of entrepreneurs for their nomination of the biggest money wasters, and there are a lot of items that will have business owners shaking their heads – unfortunately, some will be nodding in agreement.

The theme of the list is that too many small business owners get ahead of themselves and introduce unnecessary complexity into their lives.

• The complex, feature-packed website that takes days to make changes to.
• The extensive business plan prepared by a team of consultants.
• The software package that is used by major companies, but is too complex for small ones.
• The marketing strategies that sound great but are not particularly memorable.
• The office that has lots of room for growth, but also costs a bomb.
• The shiny marketing collateral that will be out of date in months.

Perhaps the best quote came from an entrepreneur named Kane Jamison of HoodWebManagement.com, who summed all this up by saying too many entrepreneurs waste too much money on “all the trappings of business – this piece of equipment, or that shiny piece of marketing material that you’re not even sure how you’re going to implement”.

“You probably don’t need any of the following: new computer, new desk, new suit, new haircut, new anything.”

The list particularly resonated with me after a conversation I had with John Williams, managing director of Sydney accounting firm Lumina.

While Lumina has a diverse customer base – including a number of SMEs and the local arms of a number of big-name overseas fund managers – Williams says he gives every client a simple test when he first meets them: Can you name the profit drivers in your business on the fingers of one hand?

Williams says many clients struggle with the common problem that entrepreneurs see sales as the only key driver of profit.

But he gives the example of a small retail store. Sales and the cost of goods sold are crucial, but wages, rent and other expenses will also determine how much profit is left at the end of the period.

Williams says that while entrepreneurs do recognise the importance of these costs, they can sometimes lose sight of why a 5% increase in wages, a 3% increase in rent or a 15% discount can have a dramatic impact on profitability.

Of course, once you can name the profit drivers in your business, you can tackle things with a new focus. In the example of the retail business above, the business owner knows exactly what they need to focus on.

The rest, as the list of the 40 biggest money wasters underlines, is often just noise.

So make sure you study the list of money wasters and then take Williams’ little test.

See if you can name your five drivers of profitability and then check your financial reports to figure out if you’re actually right.