Why isn’t my business more profitable? The 6 profit leaks

The Profit Leak Model

Over the years I’ve noticed that profit almost never disappears because of one dramatic event, it disappears very slowly & quietly. A little at a time, one decision, one habit, one compromise, then another one. Then, at some point when you’re looking at the financial statements, you wonder, where has all the money gone?!

The answer is usually simple, it leaked away, little by little. I’ve come to think of this as The Profit Leak Model. Not because profit mysteriously evaporates but because businesses develop hundreds of tiny leaks that nobody notices anymore. Most business owners spend their time trying to fill the revenue bucket but very few stop to ask where and why the bucket has holes in it, in the first place.

In almost every business these ‘profit leaking holes’ fall into six areas:

Leak 1 : poor margins

This is where most profit problems begin. I’ve seen businesses celebrate winning large contracts that made them poorer. The excitement of landing the deal overshadowed one uncomfortable fact – the margins were terrible! Many of us assume that more sales automatically solves poor margins. They don’t. Low margin businesses simply need to work harder to stand still. Growth becomes exhausting, pressure increases, cash becomes tighter. Yes, the business becomes larger but the owner’s life becomes smaller.

Healthy businesses don’t chase every sale, they protect profitable sales. That takes an incredible amount of discipline. Sometimes it means saying no. You might be underpricing because you’re scared of losing a deal to a competitor, or maybe you’re suffering from scope creep where you do extra work for a client but never invoice for it. These are the silent killers.

When last did you look at your actual costs versus your selling prices…like really do a deep audit on this? You might find that your most well known product is costing you money every time you sell it.

Leak 2: operational waste and invisible inefficiency

Waste never proudly announces itself, it simply hides inside everyday routines. People waiting for approvals, jobs being done twice, stock sitting on shelves, meetings that achieve very little and poor communication between departments do these sound familiar? Nobody notices because every individual delay feels very insignificant but collectively they consume thousands of hours every year. Consider this – your business might not have a people problem, it might have a major process problem. People simply inherit the process and don’t question or interrogate it for efficiency.

First stop – check the workflows. When a process is unclear people make mistakes, mistakes lead to rework and rework is pure waste. It’s profit flowing out of your door. You’re  paying for the labour and the materials twice but only getting paid once.

Think about your inventory too. Money tied up in slow moving stock is cash you can’t use to grow. Every day that item sits on your shelf, it’s leaking value.

Leak 3: the cost of poor leadership

This’ll be a big surprise! Leadership is one of the biggest profit drivers in any organisation. Not because leaders generate revenue directly, but because every decision they make affects productivity. Good leaders solve problems once, poor leaders solve the same problems repeatedly. Good leaders create clarity, poor leaders create confusion and confusion is expensive as it slows decisions, creates mistakes, damages customer experience and reduces accountability. This is another overlooked area, where profit is quietly draining away.

When you lack a clear business operating system your team will constantly look to you for answers. This creates a bottleneck and feeling like you’re always putting out fires, which is a serious leadership leak. Your team is waiting for you to tell them what to do and while they wait for you, you’re paying their salaries – major leak! When you don’t have hard conversations with underperforming employees you’re tolerating another lea because every day that person stays in your business, they’re lowering the standard for everyone else. Lower standard are another leak!

Leak 4: the high price of the wrong customers

This is probably the least discussed profit leak of all. Not every customer is a good customer. Some negotiate endlessly, some pay late, some constantly demand exceptions and some consume twice as many resources as everyone else. Yet many businesses proudly keep them, because revenue looks impressive. I’ve coached businesses that became significantly more profitable simply by letting difficult customers go. Revenue fell slightly but profit increased dramatically! The financial statements improved, the culture improved and the owner’s stress improved.

Not all revenue deserves to stay in your business. If you’re wondering why your business isn’t growing, it might be because your team is exhausted by your worst clients. These customers take up 80% of your time but only provide 20% of your profit. They drain your energy and your bank account. High performing businesses understand that saying goodbye to a bad client is often the best way to make room for a great one.

Leak 5: the weight of founder dependency

This is the leak almost nobody measures. When every important decision depends on the owner, productivity slows, opportunities are missed, employees stop thinking for themselves, customers learn to bypass the team and everything waits. The owner mistakes this for leadership. It isn’t, it’s dependency and dependency is expensive. I have never seen a highly profitable business that depended entirely on one person. Eventually the bottleneck always catches up!

If you’re a burnt out business owner, you’re probably the biggest leak in your own business because your presence is required for the business to function. This means the business can never grow beyond your personal capacity. You’re effectively working a job that you happened to create. To fix this you need to build systems that allow the business to run without you. This is the only way to achieve genuine freedom and increase the value of your company.

Leak 6: the power of small decisions

This may be the biggest leak of them all. Businesses are rarely transformed by one brilliant decision, they are transformed by thousands of ordinary ones. The extra discount, the unnecessary subscription, the vacant position that never gets reviewed, the supplier relationship nobody re-negotiates and the process everyone complains about but nobody fixes. One decision changes very little but 10,000 little decisions shape the financial future of the business.

That is why profitability is never really about accounting, it’s about habits. It’s about the habit of looking for a better way to do things, the habit of questioning every expense, the habit of expecting excellence from your team. If you ignore the small things they’ll eventually grow into big problems. Stop looking for a magic bullet and start looking at the small choices you make every single day.

Here’s what’s really happening in your business

Most business owners believe profit lives in the accounts department. I don’t. Profit lives in the culture. It lives inside standards, inside systems, inside leadership, inside expectations. Long before profit appears on a financial statement it has already been created or destroyed somewhere else in the business. The accounts simply record the outcome. They don’t create it. That’s why accountants report profit but leaders create it. There is an important distinction – one measures history, the other shapes the future.

The businesses that struggle most often do the opposite of what’s required. They chase revenue to compensate for operational weaknesses. They discount to win work, they tolerate inefficiency because fixing it feels difficult and they accept complexity as the price of growth. Eventually they start asking the wrong question, they ask “how can we increase profit?”. I think there’s a better question. which is – “where is profit leaking away?” Because once you start looking for leaks instead of numbers, you stop treating the symptom and begin fixing the cause.

The pattern of successful leaders

After years of coaching business owners I’ve noticed something that’s worth sharing. The most profitable businesses are almost never obsessed with profit, they’re obsessed with excellence. They build better systems, recruit carefully and develop leaders. They improve margins, remove unnecessary complexity, challenge waste and they make thousands of good decisions that nobody outside the business ever notices. Then something interesting happens – profit follows.

Success isn’t about working more hours. It’s about making better decisions and it’s about having the courage to look at your business objectively and admit where things aren’t working. If you’re feeling controlled by your business or you’re hitting a growth ceiling, it’s time to change your approach. You don’t need more sales, you just need fewer leaks. You need a proven system that helps you step back so the business can step up.

Stop filling the bucket and start fixing the holes

Ready to grow? If you want to stop being a burnt out business owner and start building a self running business, then it’s time to take action. The first step is to identify where your leaks are, but you might be too close to the problem to see them clearly. That’s where a professional business coach comes in. We provide the external perspective and the accountability you need to make the hard choices that lead to the profit & freedom results you’re after

Let’s talk about your business. We can look at your margins, your leadership and your systems together. We can find the leaks that are draining your tank and plug them for good. You’ve worked too hard to let your profit just slip away. It’s time to get the results you deserve!

Book an appointment today and let us start building the business you always wanted.

 

About John Creighton:

For the past 30+ years, John has started, built & scaled businesses.

He has successfully exited 3 start-ups (one sold to a JSE listed Company) and achieved a Top 10 place in South Africa’s Top 100 fastest growing Companies.

Today, he helps ambitious entrepreneurs and leaders build better, more focused and more profitable businesses. With a reputation for clear thinking and practical execution, he helps his clients navigate complexity, elevate performance and achieve exceptional results.

To explore how John can help you take your business to the next level, get in touch him today by email or book a free 30 minute consultation