During 3.5 years on the road as a consultant, I consulted over 126 small businesses including contractors and other service companies. To find savings, I looked to reduce waste. As clients had already identified obvious waste, my recommendations were based on small savings that added up.
For example, with contractors, I usually found waste in company tools. Crews often see it as too much trouble to recover and sort the scrap or to search for a tool they misplaced.
This type of waste adds up. For instance, one client had 14 field employees. My client said annually they spent $1,400 replacing lost stakes plus $3,000 replacing lost tools.
Typical Small Business Profit Percent
While $4,000 in tools and stakes doesn’t sound impressive, look at it from a different perspective. Having analyzed over 100 client profit and loss statements, I found the average small business netted less than 5% profit before taxes and interest. Many lost money, typically 5% to 10% in one of the last three years.
Impact of $4,400 Depends on Your Profits
Clients and their employees both assume it’s only $4,000. Here’s why it’s way more than $4,000.
On any sale, only a small portion of the sale is profit. Look at this P&L for example:
Cost of Goods Sold
Total Cost of Goods: $800,000 (80%)
Expenses $150,000 (15%)
Net Profit $50,000 (5%)
Here’s the point. You can only buy something to replace what you lost out of profit, not the gross sale. This example shows you that $950,000 out of $1,000,000 revenue paid for labor, materials and overhead, such as office help, phones and other utilities, rent, insurance, Workers Compensation, and taxes.
If your net profit is 5%, then to have the money to replace the wasted $4,000, you will need to earn an additional $80,000.
Profit / sales = % of profit
Profit / (% of profit) = sales
$4000 / .05 = sales =
$80,000 in sales needed to replace the lost tools and stakes.
Take these steps to hold your employees accountable.
- Develop an inventory sheet for each job
- Require the foreman to sign for the tools and equipment for this job
- Charge him your cost for any of the tools and equipment not returned safely unless he can show someone else signed the missing items(s) out on a Sign Out Sheet
- If someone else signed to be responsible, then charge that person instead
You can also have a required list of their own tools laborers must bring to work. This will minimize the tools you need to provide.
As cleanup is part of the job, you not only minimize the waste if they do the clean up properly, you will have a happier customer. People hate having to clean up after they paid for work on their property. Numerous service businesses have similar issues so it’s not limited to construction.
Sometimes the impact of waste is not obvious. You can improve your small business profits by reducing waste such as lost tools and stakes. The example above covered $4,400 in misplaced equipment, which is $4,400 in lost profit. This number becomes more significant when you look at $80,000 in additional sales to pay for this waste.
More from this contributor:
First Person: Calculating the Cost of Wasted Labor
First Person: Are Your Labor Costs Higher Than You Think?
First Person: The Invisible Thieves That Cause Inventory Shrink