What Are Profit Siphons … and Where Are They Taking My Money?

In the agriculture industry, farm managers have learned to watch out for a weed that Western Farmer-Stockman magazine has labeled a “profit siphon.” It is recognized by a variety of names, but it is the No. 1 weed to watch because, when ignored, it has the ability to ruin entire crops.

What are your profit siphons?

Like any noxious weed, a profit siphon starts out tiny — almost invisible — and, if even noticed, appears to be harmless. But, as all weeds do, it continues to grow. Then, it quietly works beneath the surface and sucks profits out of a business.

Unlike noxious weeds, profit siphons are more insidious, remaining invisible to all but a seasoned Expense Category Expert (ECE).

Some of your indirect expenses that can become profit siphons include:

• Document production costs
• Energy use
• Telecom costs
• Information technology costs
• Waste removal

How profit siphons take over

Like a noxious weed, a profit siphon works under the surface. Vendors are constantly looking for ways to increase their margins within their customer bases.

Some cost multipliers are buried in vendor agreements. Others occur from changes in your business needs, resulting in non-optimal equipment fleets and agreement terms that are never synced with your new business requirements.

Vendor price increases or decreases in support would be too obvious and are sure to be spotted. Multiple small and scattered changes are rarely noticed, especially if they show up on different invoice categories or support areas.

Any cost you are not watching will grow, like a weed unnoticed in the far corner of your back yard. Profit siphons can work quietly, draining your profits for years, simply because we’re not aware of them.

Do you have profit siphons? I guarantee it; almost all businesses do.

Can you isolate them and get rid of them? Yes — with inspection, industry knowledge, and skill.

Root out the source of profit siphons

Rooting out a profit siphon takes a willingness to examine indirect expense categories as well as an intimate knowledge of cost-of-goods benchmarks and vendor support capabilities within that expense category.

An ECE has deep “insider” experience in a vendor industry, usually 10-15 years. That knowledge and experience brings fresh insight to your expense spreadsheet. An ECE’s examination can yield shocking discoveries about where your organization is overpaying for goods and services.

You can’t be the expert in all industries. With a competent ECE, you can get an expert’s guidance on where you can reduce costs and eliminate your profit siphons. The best part: Your profit recapture potential is confirmed without cost.