“I’m concerned. My partner’s sole focus is on bringing in more sales and partnership opportunities. Some things just aren’t profitable enough and we might be better off without them. How can I get my message through?”
Understanding what drives profit is essential in today’s business world. Small-business owners regularly drive companies into the ground by chasing unprofitable opportunities or by spending too much to produce what they sold. Sometimes it’s better to say “no” and walk away from opportunity, as hard as that may seem, especially coming out of a recession. And occasionally it’s better to take on revenue and find a new way to provide the product or service.
What eats up profit? Customers and expectations. Employees and systems. Marketing and sales. Finance. All of these parts to the business impact revenue and profit – both good and bad.
Here’s where to start
Pull out specific examples of different customers and products. Add up what it costs to make and deliver your products or services. Deduct cost from sales to calculate gross profit. Show which sales make money and which don’t.
Add up all of the overhead for the company. What do you spend to operate the business each month, after you’ve made and delivered your products or services? How much for rent, lights, phones, insurance, overhead staff and benefits?
Ask, how many sales can you get each month? From those sales, will there be enough gross profit to cover your overhead? How big a problem do you really have?
If you’re looking to improve things, the problem could be directional, as in, “If we can get more of these types of clients, or learn how to deliver more of these kinds of services, we’ll make more money.”
It could be operational, as in, “We’re bringing in enough, but we’re wasting dollars delivering.”
It could be systemic, as in, “Our overhead is too high for the amount of sales and gross profit that we can get.”
Identify where to focus: directional, operational or systemic. Look for ways to turn it around.
Partnering for profit
Here are some things for you to consider as you talk with your partner about where your profits come from.
Customers can be demanding. Some customers don’t understand that having your company in business a year from now will be good for their business – or they just don’t care. In either case, it’s all about them. They won’t pay for, or can’t afford, price increases. Those customers you can do without, unless you can corner the market on what they buy from you and force them to pay higher prices because you’re the only game in town.
Marketing and sales are essential for any business. If your people can’t sell enough of the right products or services, or you can’t identify enough prospects for future sales, your business is heading for a future loss. Find the dollars to beef up now, before things get worse. A robust sales and marketing team, backed up by efficient, cost-effective delivery is essential for any well-run business.
Employees and systems go together. Cut out waste. Automate. Standardize. Build routines. Farm out what you can to a lower-cost provider. Get smarter. Keep a lid on overhead and overtime as you ramp up. Train employees about the importance of making a profit.
Finance keeps track of the numbers. Often I hear from bookkeepers, “I only input the numbers.” That may be true. You want to analyze the business in real time. You need more than monthly or quarterly accounting reviews. A 30-90 day information delay could be a lifetime in today’s fast-moving world.
Finally, it may be time for a discussion about roles and responsibilities. If you want to own a business, step up to the plate and master the job of ownership. Demonstrate mastery by having a business that consistently makes money, pays off its debts and handsomely rewards the owners.
