Ernest Hemingway once wrote about losing money that it, “happens at first very gradually, and then all at once.” If you run a shop that’s losing money, you probably know what he meant. Small losses slowly accumulate, turning into big losses. Eventually, there’s nothing left to lose.
Far too many shop owners get stuck in a cycle of losing money and can’t figure out how to get out of it. They keep doing the same things – producing the same products at the same prices, working with the same customers, using the same processes, failing to use effective job shop software, and more. Unfortunately, doing the same thing over and over usually won’t turn around a failing business.
Many shop owners mistakenly believe that just getting more business will solve all their financial problems. However, most failing shops are losing money because of internal issues, not because of a lack of business. Getting more business will only compound those internal problems.
If you’re losing money, it’s time to take a step back and examine every aspect of your business. It might be time for a drastic change. The good news is that if you do this soon enough, you won’t experience what Hemingway was talking about. You won’t lose it all at once.
Here are five of the most common reasons why shops lose money. If any of these sound familiar, you should take action as soon as possible:
Your bids aren’t accurate.
There may be nothing that affects shop profitability more than bidding. If you bid too high, you lose out on business. If you bid too low, you don’t turn enough profit. If you’re losing money, the best place to start your evaluation is your bidding process.
Start by examining your costs – and not just your material costs. Also look at your labor costs. We find that many shops really don’t know how much time it takes to make one unit of product. Also consider your fixed expenses and whether you’re sufficiently accounting for them in your bids.
The good news is that this is an easy problem to fix. All you have to do is start bidding with more accuracy. A robust ERP platform can help you do that. You can use the software to get all the data you need to calculate the perfect price for your jobs.
You’re buying tools at the wrong time.
How many tools do you have sitting around your shop going unused? Conversely, how many jobs do you have sitting in a queue waiting for a tool to arrive?
Time is money in the manufacturing world. You need to get jobs turned around quickly to maximize your profits. Similarly, you need your capital working for you, not sitting in a tool bin in the middle of your shop floor.
If you have tools laying around, that means you’re buying them way earlier than you need them. The problem with that is that you’ve invested capital into tools and that capital is effectively sitting around unused. If you had waited to buy them, you could have used that capital more effectively, like marketing to gain new clients.
On the flip side, you may be waiting too late to buy tools and materials, which also costs you money. The longer it takes for you to turn jobs around, the longer you’ll have to wait before you can start the next job.
The solution here is to get a better grip on your process. Exactly how long does it take for you to produce a product? How long do you need to order tools or materials before starting the job? Tighten up your process and schedule so you can put your capital to work more effectively.
You’re not managing cash flow effectively.
Bad cash flow can sink any business. You may not be able to control when cash comes in the door, but you can control how you plan for it. Unfortunately, many shop owners fail to make cash flow projections, which can lead to some really tough decisions.
One common source of cash flow issues is receivables. If your shop is like most, your clients want to pay you as late as possible. The problem is that you need that capital to keep your shop running. Try taking action to get them to pay sooner. Offer discounts if invoices are paid within 10 days. Start the collection process after 15 days instead of after 30 days. Be proactive. That cash flow is too important for you to be passive.
Also, resist the urge to use costly cash flow management solutions. Invoice lending may seem like a convenient solution, but the interest costs will eventually bury you. If you can foresee a cash crunch, try alternative solutions, like negotiating payment relief with some of your vendors. Don’t put pressure on your bottom line with unnecessary interest payments.
Your employees are wasting time.
Do your workers like to have a good time on the shop floor? There’s nothing wrong with everyone enjoying themselves. However, those good times can quickly turn into lost profits. Fifteen minute conversations can add up to hours and before you know it, you’ve lost significant production time.
Similarly, your shop floor may be set up in a way that encourages wasted time. Your employees may need to look around for tools. Materials may not be readily available. You then end up paying your workers to wander around your shop floor.
You can fix this by being more hands-on in the shop. Keep a desk out there and sit at it from time to time. Monitor how they spend their time and then look for ways to tighten the process. Changing the floor layout may improve efficiency. You may need to put some new rules in place to keep everyone focused.
You’re not delegating effectively.
This is a hard one to learn, but it can have a huge impact on profitability. You can’t be Superman or Superwoman at work, no matter how hard you try. If you try to do everything yourself, chances are good that you won’t do anything well.
Learn the art of delegation. Train your employees to take on more responsibilities and then transition work to them. That will free you up to focus on more important things, like getting your shop in the black.
Losing money can be frustrating. However, the cause of the problem is usually pretty straightforward if you take a step back and objectively examine the issues.
Having the right information can be make it much simpler to diagnose the problem. At Shoptech, we help shops just like yours better understand their process so they can avoid losses and maximize profitability. Contact us to learn how we can help you keep your shop in the black.