CVC Success Group coach, Jerry Isenhour
Video Transcript
Jerry: And I want to welcome you to another episode of The Chimney and Fireplace Success Network.
This is Episode #97 and I have entitled it “Where did the money go?”
Where did the money go? Where did the money go?
Think about that for just a minute.
Every episode of The Chimney and Fireplace Success Network is brought to you by CVC Success Group, where it’s our mission to provide the tools to make your business dreams into your business realities.
And we do this podcast to share ideas with you. Only last night, in a phone call with someone, they were telling me about one of the podcasts that had a profound effect on them sometime in the past. It made me feel really good that our podcast had given them ideas and concepts that they could make a change in their business.
So today, again, the title is “Where did the money go?” and what I am talking about is: Where did the profits go?
You know, more than likely – if you’re in business – one of the goals is to have an ROI. That’s a return on the investment. And in the free enterprise system, we commonly call this “profit”.
Now you see, profit is not your salary. Profit is the return that you get for the risk you take of owning that business. You’re a risk taker! You’re the person that makes the decisions.
Certainly, you should be getting a salary. The salary should be comparable to what you would pay someone else to do your job. But above and beyond that, a business should be delivering profit to the owners. That’s why you’re in business!
It’s an investment for you – just like a stock. You wouldn’t want to invest in a stock that doesn’t have a return, now would you?
So this is your business. So what you’re looking at here is: “How can we build our profit?”
That is why I entitled this episode “Where did the money go?” – because I want to delve into something that may just be taking a very large percentage of your profits and taking it away where these funs are not in profit column.
And what is this source of monetary loss? It’s real simple. It’s what we classify as “waste”.
So I’m going to talk about waste today a little bit and I’m going to talk about some processes and procedures that you can put into place in order to cut this constant flow of profit that goes into the waste pile; and instead, let you direct it into the profit side.
And you see, this is one of the things that a lot of people don’t realize – which is the cost of sales that are a part of waste – because, when you have waste, you’ve got to compensate it with sales.
And when you actually run the numbers and understand that all of the waste comes out of your profit; if you take your profit and see the percentage point —
Let’s take an example. Let’s say that your profits aren’t real good. Let’s say that your net profit on your business at the end of the year is 5%. That’s right! 5% of the income of the business actually ended up in the profit pile.
Well, if you’re on a 5% profit range and you have waste, do you know what you have to sell to make up for that waste? Do you have any idea?
If you’re on a 5% net profit, you’re going to have to sell $20 in sales for every dollar of waste. That’s right! $20 in sales for every dollar of waste – and it goes up from there and it makes a dramatic difference in what you’re going to see as your return on your business.
You see, reduction of waste is something that every business owner and every manager should be looking at. Reduction of waste… You need to make it a primary goal of the company.
The waste is robbing the profits from the company daily – every single day.
Only through a concentration of waste reduction will you ever be able to convert the waste dollars into profit dollars; and what this means is that you can convert these – this is going to provide you a higher return as the owner on the investment you have.
One of the things that we need to get into the habit of – and this is what we work with many of our clients – is daily measurement and tracking of waste.
Daily tracking: “What did we waste every single day?”
Because is required, the waste is directly related to the profit on the business and waste kills more profits that many can even imagine.
So implementing a system of tracking, measuring and computation of the cost of waste is vastly important, but more than that, coming up with the resolutions to lower waste dramatically.
The higher the net, the lower the number used in the calculations of what amount of sales. It’s real simple.
Where did I come up with 5% waste and selling 20 times? Because 5% is one 20th of the 100 – and that is the net on the end.
I suggest you put someone in your business in charge of the waste tracking and measurement. It’s a hefty job, but you’ve got to start the process of building the waste identification. That’s right, we call this person your waste detective.
You’ve got to identify what it is. You’ve got to track it, you’ve got to measure it and you’ve got to cost it – and you’ve got to do this every day and then you’ve got to take the steps to eliminate the habits that are causing the waste.
Because this is what people find out when they really start the waste tracking mode; they find out that they’re just simply overwhelmed when they start counting up the dollars that are wasted every single day in the average business.
I want you to think about that.
There is all kinds of ways that you can reduce waste in your business, but you’re never going to be able to reduce the waste until you have a system of tracking and measuring and seeing exactly what it is.
So from there, you’ve got to go and figure out: “What is the origin of the waste?”
What caused the waste?
You see, as you go into this, this is a transition in the company. It’s part of lean principles. And what you’re going to do in this is use this in your morning meetings.
You need to start reporting every day: “What was the waste factor of the previous day?” and find out: “What is the origin?” “What caused the waste to happen?”
The following is an amazing process and the reasons why we have waste and I want to share the 3 reasons we have waste with you. From my experience of doing analysis with companies, working on a coaching basis and a consulting basis, I will tell you that there are three causes of waste.
Listen carefully. Write these down!
Cause Number 1 is: There is no SOP. There is no process for people to follow. People are operating on their own.
Just imagine if Subway restaurants – if everybody at every Subway made a sandwich a different way – what would it be like? It would be chaos. Would you get your expectations met? McDonalds! Any other franchise restaurant. What makes them successful is the systems.
When you’re buying a franchise, that’s what you’re buying – a business system, including the processes and the procedure to be effective.
You know, in my time I have done a lot of research with a lot of companies; and what I see is, based on my visits, waste computations and true waste calculations – the following is a very honest data point.
What I’ve found is that the average waste in a company that I work with will begin at approximately $275 a day per person. $275 a day. Let that sink in.
But let’s sink in a little bit deeper. That would be for one person.
Now let’s say that this company had eight people employed in it and that was the average waste. What will we have as an average daily waste?
That would be $2,200. Imagine that – $2,200 in daily waste.
And then if we look at it for a week, on a 5-day work week, what do we have?
We’re sitting at $11,000 in waste!
And if we work all year, we’re probably going to work over the year — We’d take holidays, vacations and other things — We’re going to say that we’re going to average working 48 hours in a year. 48 hours a year.
So what does that up to in the annual waste? Sit down for this one!
$528,000.
Imagine that! What could you do with these additional profits rolled into your bank account? This is what makes it worthwhile.
You know, so often we’re after more sales, but if we don’t have a way to keep the money and if we don’t find a way to reduce the waste, then as we make more sales the amount of waste we produce gets bigger and bigger.
And all this, it may look alarming to you. It may look alarming to you, but it’s not.
Now, here’s the thing: As you start into this, you’re not going to be able to eliminate waste in a few days. It may take you years, but you’ve got to set your goal.
My suggested goal is that companies have a goal set to get their waste below 1%. Less than 1% of gross goes into the waste pile. That’s a very hard figure to attain – if you’re really, truly tracking this properly and costing it out properly.
It could take you years to get there. It’s going to take patience. It’s going to take a lot of work… but if you do it, what’s going to happen is its going to turn those waste dollars into your profit dollars.
As I started learning more and more about waste and lean principles and Six Sigma and other things, what I found was that studies of waste and waste reduction show the following.
If you can reduce your waste by 5% then the lean experts say you can up your bottom line by 35%. Think about that. That’s not from additional sales. That’s not from going out and getting additional customers.
That’s recouping the money that’s coming into your business right now and converting it from the waste pile into the profits side of your business.
You’ve got to set yourself a goal! But the first thing you have to do is establish a program of tracking it, measuring it and costing it properly.
Once you do that – once you see where your waste is at – then are you going to be able to make that reduction down to less than 1% within days? No. It could take you years.
One company that successfully did this was on a nine-year journey to get there… but you can set a goal to reduce your waste in a quarter.
How about this as a goal? How about once you start tracking and measuring your waste, you set a goal; that you’re going to reduce your waste 10% per quarter? 10% per quarter is a great goal to set, but it will take diligence to make that goal a reality.
If you could reduce your waste 10% per quarter, do you realize what the waste reduction would be in the coming year? That would be a ten and a ten and a ten and a ten!
Now that’s going to add up to exactly 40 – because the waste number is dropping, so the percentage drops – but that’s what you want to do. You want to set goals for this reduction, because again, it’s going to be very worthwhile if you go through this; as you move towards producing less waste and more profits. And that means dollars go into your profit column and less flushed down the drain.
Once you do this, you’re also going to find that the value of your company is going to be higher. The numbers of your company is going to be higher. You’re going to have a better standard for your people.
What could you do with these additional profits… Could you pay your people more? Could you compensate yourself better? Would this enable you to pull out more profits for yourself as the owner? Increase your ROI on the business? Be more attractive as a place of employment? Have a business with a hugher value that will be a benefit if you ever decide to sell the business?
I think these are some great ideas and I really hope that you’ll put this into effect and start using it in your business.
This is Jerry Isenhour of CVC Success Group, for The Chimney and Fireplace Success Network.
I want to thank you for joining me today as I have shared another one of my ideas with you; and hopefully it’s something that you can profit by and put to use in your business.
See you next week! It’s been an honor, it’s been a privilege and it’s been a pleasure to speak to you in this way.