Profiting from ignorance of small businesses

ONE OF the ugly secrets in business is that there are many wealthy and well-established companies, government entities and organisations that are profiting handsomely from the ignorance of small business owners, who in turn are suffering substantial financial losses, particularly when costing goods and services.

It may be hard for some to imagine that large and highly profitable entities could exploit the ignorance of struggling small businesses and entrepreneurs to further inflate their already-robust bottom line, but it happens too often.

The issue came to the fore again recently when a reader asked my advice about how he could access financing, so he could renew a contract for maintenance services with a well-respected corporate entity.

COMPREHENSIVE APPROACH

He was prepared to spend millions of dollars to acquire new equipment so that he could continue to service what he thought was a lucrative contract. However, I strongly encouraged him to take a comprehensive approach to the contract bidding process by documenting, in detail, all his costs, and also anticipate and budget for inflation and increased operating expenses during the life of the agreement.

I also insisted that he account for his own salary in executing the work, and ensure that he included a reasonable profit margin after all costs had been covered.

To his shock and horror, when he completed the process, he discovered that, despite a constant flow of cash through the business, he was making a loss of more than $6.4 million per year on the contract that he was convinced was profitable.

Here’s where it gets interesting. When he responded to the company with a new counteroffer that was substantially higher than the proposed contract amount, his new bid was accepted. In fact, the financial controller, in finalising the new agreement, conceded that he was concerned about how long the contractor would be able to absorb losses and service the contract.

Therefore, the company knew that their service provider was suffering huge losses on the service, and still felt comfortable profiting from the small business owner’s struggles.

RELIABLE ESTIMATES

It should be noted that sophisticated companies have very reliable estimates of what they should save when they outsource, and they also understand when they’re enjoying bargains that are ‘too good to be true’, which they know are at the expense of the ignorance of the small business owner.

A survey by Deloitte revealed that companies which outsource, typically achieve cost savings of 15-20 per cent on average, but as much as 60 per cent on labour costs. Another study by Accenture found that companies which outsourced finance and accounting functions saw an average cost reduction of 16 per cent, while those that outsourced information technology functions achieved a cost reduction of 17 per cent. Savings in excess of these amounts are usually outliers that should concern the business.

Notwithstanding, it is the responsibility of the business owner to be appropriately knowledgeable and build their own capacity and business acumen, rather than relying on the conscience of the customer to alert them that they are undercharging.

Therefore, if you lack the appropriate knowledge in accounting and costing, it is best to engage an accounting professional.

One love,

Yaneek

- Yaneek Page is the programme lead for Market Entry USA and a certified trainer in entrepreneurship.