3 Hidden Profit Drains - Episode 192

 You know your business is generating revenue. You've got clients. You're putting in the hours.

But at the end of the month, the bank account isn't telling the same story. That's frustrating, right? I mean, you're working harder than ever. But your profit isn't keeping pace with your growth.

And if you've ever said to yourself, where's all the money going? You are absolutely not alone. This week, we're going to shine a new light on a few of the most overlooked ways businesses leak profit. Not in big flashy ways, but in small persistent ones that slowly chip away at your momentum.

So let's talk about the three most costly profit leaks that you may not even realize are happening and how to plug them before they get worse. 

Welcome to the Budding Entrepreneur Podcast. Good day and welcome to the Budding Entrepreneur Podcast.

I'm your host, Randy Bridges. In each episode, we dive into practical business strategies that you can put to work in your business right away. We also focus on inspiring stories from leaders who are shaking and making things happen in their industry.

It's all about giving you the tools and insights to take you and your business to the next level. So get comfortable and let's jump right in. All right, all right.

We are on episode 192 of the Budding Entrepreneur Podcast. Today is Friday, March 28th, 2025. Today in this session, we're continuing our four-part spring series focused on helping you get your business ready for its next level.

Now last week, we talked about the signs your business is stuck and how clarity and data can create serious forward momentum. This week, we're going deeper into the money side of things because once you have clarity, your next move is locking down where your profit is slipping through the cracks. So here's what we're tackling today.

We'll start with a quote from Ramit Sethi to set the tone. We'll talk about the three hidden profit leaks that I see the most in my clients. Then we'll break down how to fix them with clear actionable strategies and we'll wrap up with a sneak peek at next week's topic.

Let's kick things off with this quote from Ramit Sethi, a financial educator and entrepreneur. He said, spend extravagantly on the things you love and cut costs mercilessly on the things you don't. That's a great reminder that profit isn't about cutting everything to the bone.

It's about spending only on purpose. When we understand where our money is going and where it's being wasted, we can protect profit without sacrificing the value. Okay, so let's talk about why these profit drains go unnoticed.

Let's get into the why that this is such a problem for business owners. Most of the time when profits are tied or cash flow feels unpredictable, the knee-jerk reaction is just to try to sell more. It's a default answer.

We just need more clients, more revenue, more action. But the truth is sales alone won't fix a broken profit model. What's really happening under the surface is this.

Your business is leaking profit in places that you're not looking. Now, this isn't because you're careless, but because these issues are baked into how the business runs. They show up in how you price your services, how you manage your team's capacity, how you handle client boundaries, many other different things.

And most of the time they're very subtle at first. You don't feel it immediately. But over time, they start adding up and start weighing the business down.

Now, the problem is they don't scream from that weight. They whisper. And because they're hiding in the everyday, you could spend months, even years, thinking the issue is sales, when it's really ultimately inefficiency.

Here's what most owners go through. First, they start feeling exhausted. They're working harder, pushing more, hiring, advertising, doing all the things that are supposed to grow the business.

But the problem is that the bank account doesn't reflect it, and eventually they hit a wall. I ran into this myself when I was first going into business with my partner, is we kept spending money on hiring, and we kept spending money on things, and I ended up having to do so much of the work because so many other people weren't doing it. And my boss is looking at me going, why are you coming in late to work? You know, I was like the CIO, and I was basically in charge of all operations

And I'm like, I didn't see anybody else getting out of bed at 3 o'clock in the morning. And if I called them, are they going to do the best job they can do? And a lot of times the answer, of course, was no. And so it was very frustrating for me to be caught between the people who were supposed to get things done and the person who's supposed to tell us what to do.

Right? And so when I looked at the actual part of the business, remember, I was in transition at this point. So we'd been in business. I'd worked for my partner, but now I was in the role of driving everything and transitioning into a CEO.

And so there is a transition point, and you're caught because the other owner is making his decisions, and I'm having to cover up all of the problems that go with it. Okay? And he'd look at the bank account, and I'd look at the bank account, and I'd be like, where's all the money? And it's because of some of these decisions that we'd made that we were not able to provide the level of profit that any normal business would do. And see, that's why today's conversation matters.

Because if you're hitting a wall, and you feel like your foot's on the gas, but you're still not moving fast enough, there's probably a lot of reasons why we're going to talk about three hidden drains that can really make the difference in your business. Let's break down those three of the most common, but often invisible, profit leaks that I see, especially in service-based businesses. Number one, underpricing your services.

Yeah, I know, it sounds obvious, but this one is deeply personal for most business owners. Many of us started our business, myself included, wanting to help people. But that heart-first approach often leads to pricing that's often too low to be sustainable.

When you underprice, you're not just leaving money on the table, you're attracting the wrong clients. Low-paying clients often demand the most, and they value your work the least. And here's the real cost.

Underpricing traps you in the weeds, working longer hours for less money. It kills your ability to invest in better team members, improved systems, and future growth. Even worse, underpricing signals to the market that you don't value your own services, and that ripples outward into brand perception, referrals, and even team morale.

If your clients say yes too quickly, or if you're constantly discounting just to win the business, it's a clear signal, you're underpriced. Let's cover hidden profit leak number two, salary misalignment. Now, this is a big one.

For most service-based businesses, over $10 million per year in revenue, you should be generating roughly $200,000 to $400,000 in revenue per team member. But here's what happens. You start overpaying some team members because they've been with you forever, even if their value hasn't scaled with the business.

Meanwhile, you underpay others, and you lose them to better offers. Worst of all, you never pause to realign salaries with outcomes. When you don't evaluate compensation in light of productivity and profit contribution, you create a lopsided structure that quietly eats your margins.

You want to reward value, not tenure or busy-ness. By tying pay to performance, and understanding the true ROI of each role, you free up cash, and create a team that knows their worth because it's backed by data. And the third hidden leak that often occurs is, many of you know this intimately, I know I do, scope creep and soft boundaries.

You know that feeling when a client just needs one more little thing, and suddenly your team's buried in extra work with no additional revenue? That's what we call scope creep, and it's one of the most subtle, dangerous forms of profit loss, especially in service-based businesses. It usually starts with good intentions, because you want to be helpful, right? You want to be generous. But what happens is this, you begin training your clients to expect more for less, and now your time, your team, and your profit are all being given away one favor at a time.

The root issue here isn't just generosity, it's the unclear boundaries. Those start very early in the process by having a very clear, we'll talk about this, but having a very clear process by which you build projects that include project planning up front. And if you don't watch it, your team starts to stretch, and they get real thin on time, your quality drops, your delivery slows, and everyone feels the strain.

If you want to stop burning out your team and bleeding profit, this is a non-negotiable fix. So let's talk about how to fix each of these. Fixing profit leaks doesn't require a total overhaul.

Seldom would a total overhaul actually help you. But it does require clarity and alignment. So here are three ways that you can start to patch those leaks and increase your profitability.

Number one, know your numbers. Start tracking your average profit per client, your delivery costs, your team's productivity ratios. You don't need a CFO, you just need visibility.

And by doing this, you'll spot where you're losing money before it becomes a crisis. This lets you course correct faster and make decisions based on facts, not feelings. Fix number two, raise your standards.

Now this might mean raising prices, it happens. It might mean charging for that extra round of revisions, whatever it might be. Or maybe it means defining clearer packages and a clearer process up front so that the clients know exactly what they're getting and what they're not getting

As an outcome, your clients will have better expectations. Your team will have more focus and your profit margins will thank you. And the third fix is audit your roles and your pay structure.

Map out, first of all, who's doing what. You don't have to do this, you can have somebody else do it, unless you're the only person in the company. But you want to map it out what each role is truly worth to the company and how their compensation stacks up to the value they bring.

Let go of the, we've always done it this way, because that is a self-limiting problem and you're really going to have to get a handle on that if you're going to make a difference here. Instead, we want to focus, and I do this myself, focus on revenue per head in the company. Make sure the numbers you are reaching for make sense.

For one company, usually a smaller one, that might be $80,000 per head. And with a company of 10 employees, that's an annual revenue of $800,000. Simple math.

If you're making more than that, that's a good sign, but if you're making less than that, maybe not. For somewhat larger companies, you might have, say, 25 employees. At that point, you're probably scratching the $150,000 per head range, based on an annual revenue of $3.75 million.

Again, it's an equal equation, so you can work either way. Start with the total revenue, divide by the number of employees, or look at the employees and generate what you think should be the average revenue per head and see if the math stacks up the other way. Now, the best service business range is in the $200,000 to $400,000 per head range.

Even in a small company of 10, we're talking about some serious numbers for revenue at $2 to $4 million. That's not bad. And you know you're well suited for growth.

At that point, you have the money to be able to grow. You have the money and the process now, apparently, to be able to scale. Start scaling, and then scale as you go.

By knowing your target per head revenue, you're bound to get a more motivated, aligned team where everyone knows their role, they deliver the results, they're compensated fairly based on performance, not just presence. And your clients will appreciate that because it's going to come through in the attitudes and the performance of the people in front of your clients. So let's wrap this up with a quick recap.

Underpricing, salary mismanagement, and scope creep are three of the biggest profit leaks, especially for service based businesses. They're easy to miss because they're baked into your habits and relationships. But once you recognize them, you can take simple, smart steps to get your margins back in shape.

If you're seeing some of these leaks in your business, and you'd like to talk through what it might look to fix them, let's connect. Head over to my website, RandyBridgesConsulting.com forward slash M-B-I dash calendar to book a complimentary maximum business impact session. It's a great way to get clarity quickly. 

Next week, we're talking about a problem most business owners don't realize they have until it's too late. How business owners burn themselves out without knowing it. If you've ever felt like your business is draining you, instead of fueling you, that episode is going to be a must listen.

That's it for this episode. I hope you picked up some valuable insights, and maybe even sparked a few new ideas. If you want to keep the conversation going, or maybe even explore partnerships, don't hesitate to reach out.

And hey, don't forget to subscribe, leave a review, and share this with someone who needs to hear it. The steps you take today could be the start of something big tomorrow. For the budding entrepreneur, I wish you the best in your health, your wealth, your business, your family, everything about you. 

Take care, and we'll see you back here next week.