By Jim Vass
As small businesses grow, there’s a crucial juncture where sales start to take off, and revenue grows, but profit remains stagnant. There’s good reason for this. In the early years, you’ve put some growth strategies in place. And if your revenue is increasing, then clearly, these are working because you become busier than you’ve ever been.
And there will be a short period of profitability lag because at some point you break through the ‘break even’ stage, having traded through the costs involved in set up and your fledgling growth. But this profitability lag shouldn’t go on for too long. You definitely need to manage it.
There can be any number of reasons for this, but as a starting point you should look at three key indicators.
Firstly, your customers. At the time of start-up and into the first few years, there’s a tendency to take on all business.
But as you grow it’s important to assess your customer base from time to time. The fact is that not all business is good business. Somewhere along the way you may have picked up a customer or two that is costing you a lot to service. Or driving you down on price at every turn. You might have customers who are continual late payers.
When profitability is not the natural outcome of your business growth, then sit down and work out your ‘ideal’ customer. The one you earn a healthy profit from and enjoy working with. It could be time to cut some ties. And this is simply a matter of taking out the weeds so you can flourish.
You have a great big market at your disposal and if you stay true to your niche, you’ll have a much better chance at maintaining steady growth and profitability.
Costs of goods sold (COGS) as they’re sometimes called – are a classic bugbear for small businesses, because they can just sort of creep up unnoticed – perhaps because of a change of supplier, an increase in wages, or rent, changes to legislation, investment in technology.
You need to understand the difference between those costs that may be a ‘one-off’ financial hit which your business needs to absorb and those which are going to be an ongoing future overhead.
Once you’ve assessed the financial impact, ask yourself: Do you need to charge more or alter your pricing structure? Your payment terms? Are you over-delivering on service expectations? What strategies have you got in place for evening out the gap between ‘quiet’ times and ‘busy’ times so that you’re utilising resources (people, stock, infrastructure) across the different seasons and cycles of your business and not raking in revenue one month and bleeding cash the next.
Lastly, when you’re satisfied you’ve got your customer and product / service costs under control, look at your overhead costs. Is it time to trim some of these expenses? After the very early years, you should start to see some economic benefits of scale.
If not… can you sub-let some of your space to a complementary business? Can you cut back on advertising and marketing? Are there some support positions you can contract or outsource and save yourself the full-time wage? Are you paying too much interest on loans or too much for your insurances? Telephones? Every saving counts, so long as the decisions you make support your growth and won’t hinder it in the long run.
All businesses go through ups and downs, and the external market is constantly changing, and so you too, must be adaptable.
Maintain a flexible mindset, be open to ideas and, when necessary, have the strength to make tough decisions.
But don’t panic, make decisions with a strategic mindset, not simply for short term gain.
However, if your profit is continually not keeping pace with your business growth, there’s definitely something out of balance. And every problem can be solved, sometimes the solution is just not obvious to begin with. If you need help, talk to us. After all, you started this business to make money, and it’s important that you see the financial rewards of your hard work.