Let’s start with a question. What is profitability?
In the simplest terms, it’s the number you ‘get to’ after all your sales have been counted up, and all the expenses subtracted at the end of your financial year. But that doesn’t tell the whole story.
It’s the difference between thriving in business and surviving. Thriving means enjoying your life on your own terms, having your business serve you in terms of your ambitions and you and your families safety and security.
Surviving means not knowing what to do next. Spending every month in a never-ending cycle of robbing Peter to pay Paul. Borrowing from your business, the bank, your friends and family, just to make this month’s payroll, again. Wondering how you are going to afford the school trip for the kids, or Christmas, or the tax bill.
It needn’t be like that. It’s enough to drive many entrepreneurs to give up on their dreams of owning their own company and back to the world of employment, or worse. The endless grind of making ends meet is no fun at all, and definitely not why you got into business in the first place.
In more than 15 years of running businesses I’ve seen the same 7 things come up time and again and having a direct impact on your profitability.
Make sure these areas are all on song, and you’ll make sure your business is profitable. And profitable in a real world, cash in the bank sort of way, not in an end of the year accounting sort of way.
Make your cash king
‘Turnover is vanity, Profit is sanity, cash is reality’! We all think in profit terms but spend in cash terms. Having enough money in the bank is all consuming and you need a system to make sure you are looking after yours. Its deadly to simply let the money flow in from customers and back out to suppliers or other bills.
In my business I operate a specific cash flow system called ‘Profit First’ it works on the basis that I allocate exactly the right percentage of my incoming revenue to various ‘pots’. For instance, I have a profit ‘pot’, an owners pay ‘pot’, and an operating expenses ‘pot’ and so on.
I’ve worked out what percentage of my turnover I want to spend on each area of the business, and I stick to that. If there isn’t enough in the pot, I can’t spend it!
This leaves me with end of quarter profits, a regular salary, money set aside for my annual tax bill etc.
Systemise your sales effort
Second to cash flow, is sales! And without sales you don’t have cashflow, but without cashflow you can’t run the business. So that’s why I think of it that way.
The single biggest mistake I see companies make in terms of selling is reinventing solutions to the problems they face every day. Sales is a function of activity. The more you tell the more you sell!
Work out the best system for you and for your product or service and write It down. Look at it as dispassionately as you can and make improvements where possible. No sales effort can close every sale, it’s just not possible, so instead, focus on undertaking as much sales activity as possible given the resources you have and the system you have designed.
Stick to the same systems and improve them as data comes in from your increased levels of activity. At all times ensure you are making as many sales calls as possible within the resources you have and don’t let it slack.
The so-called sales double helix occurs when you sell hard when there isn’t much in the pipeline and then slack off to service the sales you’ve made. Then one day you find there’s nothing in the in the pipeline again and the process starts over.
If you don’t have a sales team for your business whose job is 100% selling 100% of the time, divide your time into sales time and implementation time. Don’t try and do everything at the same time. Make Monday and Wednesday sales days and Tuesday Thursday and Friday delivery days, or whatever works for you.
Make your brand a badge of reassurance
Marketing is a HUGE area, and one that encompasses sales, advertising, digital, product development, people, research, etc. For our purposes, and assuming you don’t have a vast marketing function at your disposal, I want you to think about this as your ‘brand’.
Typically, local and regional companies don’t have brands, they are the ‘where’ to national companies ‘what’. That is, most small businesses have settled for becoming the place to go for a specific product, like your local dealer and BMW motor cars for instance.
So, what do you want to be famous for? Why should people come to you rather than anyone else? How do you differentiate yourself from the competition? Who is your audience and what’s the best way to reach them?
Why should people trust you and your company?
Don’t just chose a pricing strategy out of thin air
Obviously related to Marketing, your pricing strategy is probably more important than you realise. There are two specific areas to think about. The first is whether you want to pursue a ‘penetration’ strategy or a ‘skimming’ strategy.
A penetration strategy means pricing your product or service at such a level that you ‘buy’ market share by under cutting the competition. This is a well-recognised and relatively easy to implement plan, but you MUST ensure you are either the cost leader or are able to sacrifice the return on that product for the duration of the strategy.
There is no point under cutting the competition if you are going to cut your own throat to do it!
A skimming strategy means you’ll price at a high level and maximise profitability in the market place before being ‘caught up’ by your competition.
Typically for this plan to work you’ll need a real competitive advantage. Something like being first to the market, or providing a fantastic added value, or having a really powerful brand are all ways to make sure you can charge maximum price.
The other thing to think about when it comes to pricing is where you want to position yourself as a business or a brand.
If you want to come over as a luxury or top end company, then competing on price is going to undo you. Conversely, if you are the cheapest, then don’t worry too much about what you look like, your segment is probably only interested in how much they can save by buying from you.
Spend less money!
This seems an obvious one, but I’m willing to bet you that I can save you at least 10% of your cost base overnight.
Many businesses accrue costs like subscriptions or over pay for business services like data destruction or accountancy because they operate a ‘fire and forget’ mentality. Once a purchase has been through the initial process of being agreed, it’s really easy to just let those purchases roll on.
Are you sure you have the most cost-efficient telephone plan, or ISP, or IT company or web company, or whatever? When was the last time you checked? When was the last time you asked for a discount? Just because you’re a good customer!
Believe it or not, our clients aren’t the only people allowed to ask for a good deal. And if you don’t have a supplier willing to come to the table, maybe it’s time to have a look for alternatives?
Of course, most businesses biggest costs are staff. Do you still need as many people as you’ve got? Or maybe you need more to maximise on the potential business you have in the backlog? Only regular review, and preferably regular review with someone not too close to the business to see the wood from the trees will answer these questions.
Build your Cash Reserves
Having reserves means never having to worry about being off work through illness, or having down time for a long holiday, or when the order book temporarily backs off a bit. Or maybe you’d like to buy some new machinery to make you more efficient or put yourself through that MBA after all these years.
Having cash reserves in the business makes for a healthy business, and a business that isn’t contributing to your early demise through stress!
The only way to build cash reserves is to run your business profitably, and the way to continue to be profitable for ever is to continue to build the cash reserves.
Becoming profitable enough to build cash reserves is what it’s all about. It sounds simple but having someone walk you through the plan to achieve whatever it is you want to achieve and then holding you accountable to that plan is essential to making sure you stick with it.
Destroy your Debt
The flip side of a cash reserve is debt. Instead of building up cash in the bank, why not take your hard-earned new profits and use some of it (not all, you still need to take that profit out to enjoy your business once in a while) to pay off what your company owes. Here is a great technique to use.
- Every quarter take 90-99% of your profit in disbursements and use it to pay off the smallest debt you have. And then eat into the next smallest debt as much as possible.
- Next quarter pay off the next smallest debt and then the next smallest debt and so on.
- As you increase profitability, you’ll be able to afford to pay off the larger debts as you get to them.
- Once that debt is crushed, transfer that attention to your cash reserve. Take 50% of the profit due and reward yourself and your family, and lock 50% away in the vault.
These 7 steps sound simple in themselves, but they are harder to do. And they are even harder to do when you’re hip deep in running your own business. Maybe taking a bite from each step is the way to go. Alternatively, you can talk to me to understand what steps you should be taking to ensure you are permanently profitable and find out how I can make sure you get there.
Tony run’s Novo Consultancy, a business transformation firm. He is an accredited Profit First Professional, that is a business coach with a speciality in driving profit. Clients include National Charities, Universities, Welsh Government funded organisations, regional retailers, and National media companies. For more than 15 years I ran media businesses including National Commercial Radio Stations for the Guardian Media Group, Regional Newspapers for UK Publishers Northcliffe Media and global online Entertainment brands such as Team Rock and Metal Hammer Magazine.