How to Eliminate Money Leaks to Maximise Profit
Money leaks - it can often feel like every time you get money into your business, it goes back out again in costs. Then more cash comes in, and again, it disappears. Repeat, every week and every month…
The reason being there being not enough money left over might just be because you have money leaks in your business (it is for 99% of businesses we see)
Imagine a water tank that you fill to the brim, ready to be consumed at the end of the month. When that day comes, you check the water tank and find that there’s almost no more water left!
All that effort to fill it up and waiting for the perfect time to finally use what you worked hard for, just for nothing?
It’s the perfect analogy to money leaks. Here’s an exercise you can do to eliminate money leaks in your business and to finally eradicate entrepreneurial poverty that you might be feeling the pinch from.
Gather together all your business’s bank and credit card statements.
Gather every physical and electronic statement that would tell you where business money is being spent for the last 12 months. Make sure you don’t miss anything, such as Paypal statements.
Don’t scrimp and decide on doing only two or three months.
It is necessary to do 12 months because some expenses reoccur annually. You might miss them if you work for a much shorter time.
Is this expense 100% necessary
I do this exercise with physical copies of all statements, but it can easily be adapted to doing it online or electronically.
Go through every single expense item line by line, month by month, and page by page.
For every item, ask yourself:
“Is this expense 100% necessary to keep the proverbial lights on in my business?”
Would I not be able to trade without this expense? If the answer is yes, then circle that expense with a red pen.
As you go through your items, some expenses would be recurring monthly.
Still, ask the question every time.
It drives the point home that a recurring expense might be unnecessary after all.
Once you get to the bottom of the pile of paper, flip the file back over.
This time, with a highlighter in your hand, ask yourself:
“Is this expense delivering me a positive return, either in terms of money or time?”
Is an expense giving you back more money than you put in?
Or is it giving you back time so that you are freed up to do higher valued work?
If the answer to that question is yes, highlight that expense.
Again, go through all the expenses line by line, page by page, item by item, month by month.
Including those, you have already circled.
Go back to the beginning of the pile again.
You’re then going to have expenses that are neither highlighted nor marked with a red pen.
The question then becomes: What is the purpose of those expenses? Why do you have them?
In many cases, they might be nice-to-haves or items that you signed up for and forgot to cancel, such as a free trial that carried over to a paid month.
These, and other unmarked items, are your money leaks. There’s no purpose, they’re not necessary, and they are not delivering you a positive return.
Sure, they’re handy and sometimes nice to have, but you need to understand that those nice-to-haves mean that there are fundamentally less profit and therefore less money in you and your family’s pocket.
That is the trade-off you are making with your nice to have in your business.
In the case of subscriptions where you’re bound in contract, make sure that you write the date you can cancel in your diary. You can also speak to the vendor and see if you can downgrade or change in some ways. This way, you can minimise unnecessary expenses.
This exercise should allow you to be clear on your spending and how your expenses should help you when you are thinking about maximising profits in your business and, in turn, maximising the amount that you take home.
Rinse and repeat
I urge you to give this a go as soon as possible, and then at least every quarter. As your business changes, certain things will fall in and out of the three buckets: the nice to have, the ones that give you positive profit, and 100% necessary buckets.
It is an excellent use of your time to identify and eliminate some money leaks. It might take a significant chunk of your time doing all the steps, from compiling the documents to going through them at least twice, but it’s going to be worth it.
The sooner you do this, the sooner you’re able to keep your “tank” safe and filled with money you can enjoy.