The reasons why a business would fail to post a profit are many. According to the Small Business Administration (SBA), the majority small businesses take at least a year to show a profit due to the fact that it takes some time to generate enough revenue to cover the company’s start-up expenses. There are other factors though, such as challenging economic conditions, poor resource management, and changes in industry trends.
Identifying the cause behind of a business’ lack of profitability and taking appropiate corrective action can dramatically (and often quickly) turn a business around. Here are some areas of consideration:
- Are you utilizing metrics, forecasts, and other reports? There are countless financial and performance reports that a business owner can use to both measure and predict business performance and thus spot a potential problem. Budgets, income statements, cash flow statements, and salesforcasts all fit into this category. Prepare a budget on an Excel spreadsheet and refer back to it often. Make sure to link work activities to your income. If you are in sales, make individual sales projections. If you deal in flat-rate services, track contracts closed and the dollar value of each contract. If your services are sold by the hour, track contracts closed and billable hours.
- Are you being fiscally responsible? In order to make money, you have to keep a close eye on your spending. Are you about to spend money on something for your business? Ask yourself if you really need it and whether it is within your budget.
- How is your inventory management? At times a business may not be profitable because too much capital is being tied up in unused or slow moving inventory. Look for ways to free up over stocked inventory supplies, and make those bulk purchases wisely.
- Are you paying too much for your overhead costs? Overhead (or operational) costs generally consist of some of the biggest expenses facing a small business. These are expenses such as payroll, rent/mortgage payments, and utilities. Look for ways to reduce your overhead by, for example, sharing office space or opening your office at home. The latter will provide you with double savings, both on rent and commuting expenses.
- Are you pricing your products/ services properly? The profitability of a business also depends on the rates you charge for your product or service. In order to lure in customers, many new business owners tend to undercharge for their service or products. You need to ensure that your rates are enabling you to turn a profit.
- Is your location working for you? Evaluate your current location. Is it too far from your potential customer base? Is it too far from delivery routes. What about the commute for you and your workers? What image or message does your location give to your potential clients?
- How are your employees performing? Your employees play a vital role when it comes to profitability. Whether you deal in sales or any other area, every team member contributes to delivering value to customers. Examine each employee’s success factors: For example, does your marketing assistant increase business through his/her efforts? Has your sales team met its quota? If you define critical activities you will effectively motivate your employees. Take heart – if you treat your staff as partners to your success and establish reasonable goals for the future, your small business is likely to flourish.