With small businesses, the buzz word tends to be about cash flow, but ultimately, we want to navigate our operations towards profitability. Few start ups talk about profitability (likely because it can be difficult to achieve initially), but it's one of the most important metrics in growing a business - and the reason most set up in business.
Under performance is often due to business owners not knowing what they don’t know. Tasks such as hiring, taxation, compliance, marketing and IT are overwhelming and can be confusing. Business owners can easily drown themselves in the micro and never devote the proper time to planning for the future.
A recent study by Xero highlighted that business owners with professional support save more than 6 hours a week. accountants and business growth experts we see the SME's that succeed are those that not only think ahead, but also obtain practical advice from their trusted advisor that helps to properly manage growth.
Here are some of our best tips for improving small business profitability:
1. Find a sustainable advantage
Warren Buffet refers to this as the "economic moat" where the castle is a metaphor for a company and the moat represents a strong competitive advantage. The wider the moat, the larger and more sustainable the competitive advantage. By having a well-known brand name and a large portion of market demand, a company with a wide moat possesses characteristics that act as barriers against those trying to enter, whilst allowing exclusive entry to those invited.
2. Aim for predictable cash flows
Those with larger sales cycles or a dependency on a concentrated set of clients for distinct periods of time may find it difficult to predict cash flow as the business scales. Securing longer-term customer contracts and stipulating longer "notice" periods for cancellations can reduce volatility around earnings. The longer your sales cycle, the more important it is to have "clues" that tell you where things stand with the business. Also command a larger share by looking for products or services you could cross-sell or upsell.
3. Make yourself invaluable
While customer retention is key to profitability, speed, simplicity, time and cost savings are just a few of the perceived benefits that can make your offerings "sticky." Also create a high cost of switching, if possible.
4. Maintain healthy margins by managing variable costs
Covering fixed costs is necessary to keep your business alive, but it's the variable costs that can doom it since they do not rise and fall based upon the company's revenue. Since they can rapidly increase, decrease or eliminate your profit margin altogether, variable costs are important to consider when establishing prices. Knowing and managing variable costs is essential as you respond to changes in the marketplace and in your company’s growth patterns.
5. Be a price maker, not a price taker
Businesses who are heavily reliant on a small number of customers can easily find themselves managing a declining price structure or meeting an increase in demand for the same pricing. Diversification in both products/services and customer base will generate more predictable cash flow, help to keep your offerings interesting and front of mind for the customer.
6. Focus on organic growth
Organic growth allows you to focus on factors directly within your control, such as identifying more cross-sell and upsell opportunities for your existing buyers. All too often, customers who come to you with one specific pain point have others that can be alleviated by other products or services in your portfolio. According to a study in the book Marketing Metrics by Paul Farris and Neil Bendle, the likelihood of selling to an existing buyer is 60% to 70% while the chance of selling to a new prospect is only 5% to 20%.
7. Plan ahead for funding needs
Many SMEs stifle their growth because they take a reactive approach to funding, typically leaving only seven days, on average, to finding suitable finance - and usually with only one lender. They generally approach the bank, who's response frequently is 'computer says no'. This often results in rejection, a frustrating waiting game or second-rate terms if you're fortunate enough to get a timely approval. Partnering with an advisor who can help you answer the tough questions and position your business in the best light to a range of suitable lenders can be instrumental in facilitating the process and helping you find the right funding at the right time.