Case Study |Stemming profit leakage

The client is a small (owner plus two apprentices, plus the owner’s spouse performing some admin and bookkeeping work) electrical business located in a small town towards the northern edge of the Hunter Valley.   While all employees live in this small town they service clients as far south as the NSW Central Coast and west to Singleton/Muswellbrook.

They provide a wide variety of low voltage electrical services to residential, commercial, agriculture and government (particularly Transport for New South Wales Transport and the Department of Education).

They have two fully equipped vehicles sufficiently stocked to meet the day to day requirements of the customer base.

Industry category

Electrical Trades

Executive summary

After several years working for a Hunter based electrical products wholesaler the owner and his wife established the business in 1999. 

In the following 19 years there have been periods of growth and contraction.  The one constant appears to have been frustration at the lack of sustained growth and profitability.  Staff continuity has also been an issue with several apprentices having worked for the business but not stayed long term. 

The business is the sole source of income for the family, and while it has provided a consistent and comfortable enough year-on-year income it has not set the family up for the long-term lifestyle they desire.  As the owner put it “they’d had one year repeated 19 times”, and something had to change, or this pattern would continue indefinitely.

In June 2018 a Business Diagnostic showed more than $75k of potential profit leakage on the current turnover of $600k.  Peter Coughlan from BSPA was engaged to help improve the profits, growth and value of the business.

The first step was to proceed with preparation of a strategic business plan.  This was facilitated by weekly meetings over the first 10 weeks. Concurrent with this, a series of immediate actions were put in place to better share the workload, improve systems and reduce the very high reliance on the owner in all aspects of operations.

At the time of writing this case study there naturally were no discernible financial changes, which in fact were not expected as the business was not requiring rescue.

Accordingly, this study is going to focus solely on some of the poor business behaviours which were identified and for which immediate actions could be taken.  Regrettably these behaviours are common place in many businesses and always lead to sub-optimal performance.

Issues & outcomes

In no order of importance some of the issues already identified and where correcting steps have already been implemented include:

• The owner and his spouse had spent minimal time considering their long-term aspirations for the business, nor indeed how the business was to form part of their long-term family aspiration over whatever timeframe.  The simple act of being taken through a holistic planning process has already helped them articulate their thoughts and clarify their plans.
• It became clear very quickly that staff had been working in an information vacuum.  They had no accurate idea of the plans of the owner, the performance standards he wanted nor how their own performance was relative to the owners’ expectations.   Performance self-appraisals were done by both apprentices, followed up by an open and honest discussion with the owner clarifying areas where there were differences of opinion relating to performance.   These employees had been with the business for up to four years and had never received any structured feedback regarding their performance.  A BSPA self-appraisal template was provided, and as this was a first for the owner Peter Coughlan facilitated the staff meetings.   The owner is now sufficiently skilled to be able to conduct future structured discussions on his own, which have been added to the annual planner (see below) to ensure they do occur.
• The employees constantly “passed the buck” to the owner.  In the event of any problem, no matter how large or small, they’d be straight to the owner.  The owner then immediately answered the problem – meaning he was always being interrupted.   Coaching of the owner has now started a change in the way he handles these calls.
• This business had no digital presence.   The business historically has derived most of its new customers from direct referrals.   In the digital age, where most people fact-check recommendations via a web-search, a quality web-site and/or business Facebook page is a must.  A digital marketing expert has been engaged to change this as a matter of priority. Employees are also now aware of the expectations on them to always be on the look out to provide appropriate quality content.
• Financial performance was effectively never reviewed at either the individual job level or overall.   The owners ran the business off cashflow.  Relevant reports from both the job-costing system (Tradify) and the general ledger (Xero) are now being prepared and on the agenda for review at monthly management meetings.
• There was no budgeting system in place.  Without such a system it is nigh on impossible to undertake the planning required to properly grow and manage a business.   A BSPA activity-based budgeting template was used
• There were minimal documented systems.  As a result, the owner was on call almost 24/7 to clarify or deal with, often procedural, issues that clearly could be handled by staff if only they knew what the process was.  While this will be long exercise to complete across all business activities it has now been commenced and staff are better placed to deal with matters without the need to resort to the owner for direction.
• Tasks, renewals, registrations, ATO matters, even invoicing customers and the like, were generally undertaken at the last minute.  An annual planner has been provided, to show on the wall of the office so it’s visible to all staff, so that all business matters are addressed in an appropriate timeframe.
• A stocktake of inventory/consumables had never been undertaken.  Accordingly, there was lost time on jobs as staff needed to buy products at the last minute that were thought to be in stock, while the store room has clutter from obsolete stock.