Profit drag is a term I made up and not a terminology you’ll find in business journals. At least not yet.
Profit drag happens when weak areas of our business continue on and on. Never showing signs of profitability. Yet somehow these areas show enough life that we allow them to drag on and on.
Some believe we need to shore up these weak parts of our business. Because, one day they’ll become a smashing success. So we continue to focus on the parts that are under performing, have shrinking profit margins, slowing sales, less market enthusiasm, or just not making money.
The thinking often goes like this. If we just gave it more attention, or pour enough money into it, or put our best people on it, we can turn it around. Sometimes these efforts work, but often it just distracts us from the parts of our company that are profitable and doing well. So, to increase profitability, we must eliminate profit drag.
In other words, it’s better to treat these poor performing areas like a cancer. This means diagnosing the cancerous parts and eliminating them using any means necessary. The hard part is knowing whether it’s cancer or just a patch of blotchy skin. If you’re having difficulty determining the mildly sick from the cancerous portions of your business dragging on profits, ask yourself these questions.
Twelve Questions to Determine Profit Drag
- Is our product too cheap (or too expensive)? Or is it that nobody wants the product at any price?
- Is it really a weakness in our process or manufacturing? Or is our economy of scale so small that we can’t compete with the ‘big boys’?
- Does the product or service really meet the needs of our customers with the value they desire? Or should we discontinue it and focus on something else that will?
- Is the product part of our core market? Or are we just playing on the fringes with some new fad sweeping our industry?
- Are we pushing too hard? Or we just ahead of the market?
- Is there really a market for our product? Or are we just fulfilling some dream of hitting it big?
- Is the profit margin ever going to be wide enough to justify the waste of our time, money and energy? Or should we just move on to something else with more potential?
- Does our product reflect our core values? Or have we gone off track?
- Are our employees fully behind this? Or are we just blindly pushing our own agenda?
- Is the service something that we have the expertise and ability to provide? Or are we just copying our competitors to stay relevant?
- Are we wasting time and resources on something irrelevant to our business model? Or are we opening another line of products or service that supplements who we are and what we do?
- Is the weak part an ongoing problem that can be realistically fixed? Or is it a continuing detriment to the parts of the company which provides positive cash flows for future opportunities?
If the majority of your answers are positive on the second part of these questions, then I say that part of your business is probably a cancer. So instead of pouring more time and energy into it, maybe its time to cut it out completely before it spreads to the other healthy parts of your business.
Its kind of like having an open parachute on your back. Every-time you get going and start making profit, the unprofitable portions of your parachute opens up and slows you down or even drags you backward.
3 Areas to Eliminate Profit Drag
Target Time Wasters
Having your employees do redundant, unnecessary and time-consuming tasks focusing on the dying parts of our business is a huge ongoing drag on profits and a bad use of time management. For example:
- Having long unproductive meetings that take our people away from what they do best poses a big drag on profits.
- Following old outdated practices and making employees jump through hoops to get their jobs done kills both time and motivation.
- Forcing people to use old technology, because you’re too cheap to upgrade to new hardware and software equals slower adoption and responsiveness to our ever-changing global environment.
Eliminate Energy Wasters
Wasting energy is not just about leaving our lights on, it also includes wasting operational, administrative, production and human resources on items not adding to our bottom line or customer satisfaction. For example:
- Focusing on too many products or services means dividing the time and attention of ourselves, employees and resources.
- Having messy, cluttered and unorganized works spaces because we’re so busy juggling all we have to do and can’t afford the time maintain a proper work-space.
- Keeping old, worn and ill-functioning equipment because we’re spending money on other areas. This means less finances or resources to purchase the right equipment for the areas we’re most profitable in.
Good Idea, Wrong Business
Just because their not making us money now, doesn’t mean they’re not good ideas. For example:
- Sometimes we focus on things outside our business model. This means the way we’ve established and set up our business doesn’t fit with what were trying to do.
- The product or service may generate great profits, but we don’t have the knowledge, ability, expertise, backing or manpower to pull it off.
- Maybe we’re more entrepreneur than business owner and should sell our current business and start a new one, or find partner’s or investors to help.
Eliminate Profit Drag Conclusion
As we can see, there are many things that can be a drag on our profits. Its kind of like having an open parachute on your back. Every-time you get going and start making profit, the unprofitable portions of your parachute opens up and slows you down or even drags you backward. Allowing these areas to continue is akin to ignoring cancer hoping it goes away. So, in conclusion, maybe its time to take a long hard work at the various services, products, offerings, procedures, processes, and other business activities. And determine which are healthy, and which are a cancerous drag on your ability to make money.