Adding to Profits by Subtracting 'Sinkhole' Snags
There is an easy way for a dealership owner to increase profits: Cut losses and pay attention to these areas of business often relegated to lower departments.
September 4, 2014
Based on studying thousands of companies over decades of time and crosschecking with data from insurance companies, the Labor Dept., Commerce Dept., FBI, Department of Justice, Bureau of Labor Statistics, National Federation of Independent Business, security companies and others, I learned businesses lose 10% to 20% of revenues to multiple sources.
Collectively I call that the “sinkhole.”
I was a national presenter in a webinar for auto dealers. In preparation I spoke with an accountant who handles hundreds of dealerships. I learned auto dealers make less than 2% profit before taxes. Large volume/tight margin has a special meaning. It presents a special opportunity for dealers who wish to significantly increase their profits.
Dealers are making about 17% but losing about 15% to routine “wallpaper” losses: Things that blend into the background, some undetected ones and occasionally some that stand out, and ending up with their 2% profit. It means if they could cut those losses by just one-quarter, it would add more than 4% of revenues to profits, which would triple their profits.
When most dealers think about how to increase profits they think about sales. But there are natural limits such as geography. There are diminishing profit returns, because each new sale takes a little more advertising than the previous one as you go for higher-hanging fruit.
There is really a much easier way to increase profits. That is to cut losses and for the owner to pay attention to these areas of business often relegated to lower departments.
Not knowing how to solve these problems, regarding them as “just the way things are” or figuring you already have people handling them is just giving up the fight. The idea that insurance covers all these things is another misconception.
Nine Loss-Making Headaches
Changing these nine areas takes special knowledge, coaching and commitment. It would be impossible to eliminate all the losses, but a realistic goal such as cutting 25% is doable. Here’s the nasty nine:
Sickness of workers. Lots of workers who eat no breakfast or just doughnuts and coffee. Some bad backs. Lots of colds all the time. Forbes Online reports this costs employers $4,300 per worker per year. Lowered productivity of people at work sick is a big factor.
Workers’ comp. A couple phony comp claims, a couple real ones. Time in court fighting phony claims. OSHA and insurance reports. According to Liberty Mutual the indirect costs of workers’-comp incidents run five times the direct insured amounts. This includes rehiring, retraining, bad p.r., effect on other workers’ morale, damage to equipment, managers’ time in depositions, reports. Non-traumatic conditions such as carpal tunnel are 40% of claims. Most incidents are preventable.
Theft by employees. About 30% of employees steal all the time, according to the U.S. Chamber of Commerce. Even if it is not a major heist it is demoralizing and destroys the family-company feeling the dealer wishes to build, and it’s no fun for the honest employees because they put up with it under intimidation.
Outside theft and vandalism. When these things happen it is very disruptive and is never on the calendar or To-Do list as something anyone was allocated time to deal with, but then must be handled on all-consuming emergency basis.
Threats or physical violence. Rare at some companies, common at others. When it happens it is memorable. There are 2 million such acts at workplaces reported to police each year.
Lawsuits for slip-and-falls, real or phony. Depositions, loss of managers' time, insurance reports. There are 9 million slip-and-falls per year.
Auto and vehicle accidents on the property or off.
Embezzlement and fraud. This is a big one. Most people either had it happen or know someone it happened to.
Arson is not a leading problem but does strike 31,000 businesses per year. Most victims, though insured, are out of business within 2-3 years following the event.
What happens when these things happen? How does it feel to the owner? One company owner came in Monday morning, saw how vandals had destroyed every piece of his custom machine-shop machinery, had a heart attack and died on the spot. Lesser “wallpaper” type losses are just a disturbing background irritant that managers can never quite get to, due to their daily demands.
People have come to learn too late that insurance doesn’t cover lots of things. Recurrent below-the-radar, below-deductible thefts are not covered. Insurance may replace equipment or a burned-down office, but downtime, consequential damages and loss of customers’ business while the company can’t operate – are not covered. When it is a major loss – ask any agent –future rates may double or triple.
“Research indicates that 80% of businesses that suffer a major incident will never fully recover their pre-loss trading position and some of these will cease operating entirely,” according to Chartis Insurance.
Is it possible to target cutting these combined losses by one-quarter? Yes, it is if problems are properly analyzed, workers trained and progress quantified and tracked. It makes a healthier, safer, friendlier work environment. It builds teamwork and can triple the profits.
Ken Hantman is president of Perimeter Protective Systems Inc. He can be contacted at 866-633-3813, [email protected] or visit www.perimeterprotectivesystems.com
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