You’ve been putting a ton of work into your business, and things feel like they’re paying off: you’re getting more customers, making more sales, and building brand recognition. So why aren’t your profits matching this growth? If you’re not seeing boosts in your profits as your business becomes more successful, there are a few key areas you can look at to explain or fix this.
Your overheads, or fixed costs, are the ongoing expenses of operating your business, and they can be the reason you’re not seeing an increase in profitability. They include things like:
We recommend getting a clear picture of your fixed costs through your financial records. Then, you can work out what your gross profit and gross profit margins should be in order to break even - when you’re making enough sales to cover all the costs of running a business - and to achieve your profit goals. We like to use a scale outlined by Greg Crabtree in his book ‘Simple Numbers, Straight Talk, Big Profits!’ and set a target gross profit margin of 10%.
If you’re still uncertain what your profit goals should be or need a little extra guidance, check out this blog.
Another common pitfall business owners make when they’re not seeing a growth in profitability is because they’re increasing their overheads too soon. A bigger office or more administrative staff might be nice, but we recommend only investing in new fixed costs when you reach your profit goals and your current fixed costs are no longer adequate to suit the size of your business.
It’s a smart move to be investing a portion of your profits back into your business to help it grow. Most growth strategies - especially fast ones - will require you to spend some money. We’re talking about marketing materials, ads, branding, and more. However, it’s still important to be tracking costs and making informed decisions to get a solid ROI.
For most businesses, we recommend committing 5% of your revenue as a marketing budget. If you’re just starting out, though, this might not be enough; newer businesses usually have to spend more in order to get themselves off the ground and start building a loyal customer base. You’re buying website domains, designing a logo, and buying ad space to target your ideal demographic.
When it comes to accounting, the money you spend on marketing and promotion will be categorized as an expense which will impact how profitable your business appears. But we don’t think of them as a “pure” expense. They’re more an asset, or a resource that provides economic benefit in the future. Like any investment, you can be carefully tracking your ROI (or return on investment) and making adjustments when you’re not getting your money’s worth. For example, if you’re paying for an ad on Facebook and you’re not getting the clicks and traction to make it worth it, it may be time to reconsider your strategy and direct that investment elsewhere.
It’s always exciting to bring on new employees. Your business is growing and your team is growing alongside it. Like marketing materials, hiring and onboarding is an investment that can impact your profitability in the present but increase it in the future. Not only are you paying an additional salary every month, but you’re also spending money on the time and equipment it takes to train a new hire.
For hiring, we recommend a similar mindset as expanding overhead costs: growth for the sake of it is expensive, but bringing on new team members to match your business’ size is a wise investment.
Also known as death by a thousand SAS cuts, software overkill is something we can personally relate to. We love trying out new software, seeing how it can make me more productive, streamline operations, or take care of our customers better. And while software fees may seem small in the moment - $20 here, $50 there - all these monthly subscriptions can seriously add up.
To help avoid software overkill, dedicate a few hours of your time every three months or so to look over all your current software accounts. Likely, you’ll find one or two subscriptions that aren’t adding to your business or being used as often as the others, and you could save yourself hundreds or thousands of dollars a year by cancelling them. Not bad for a few hours of work.
Sometimes, even when you’ve got good profit margins, have considered your overheads, and are being wise with your investments, you can still feel cash-starved. You’re paying suppliers late, stressing over bills, and constantly checking your bank accounts to see if you have enough to get through a day of operations. Being low on cash is incredibly stressful for a business owner, and it often is due to your profits not transferring into cash in hand.
There are a few processes you can set in place to help get some cash into your accounts. Usually, increased profits but low cash is due to your Accounts Receivable. While you might have more customers, you’ll still need to ensure these customers are paying you on time. This could mean setting up a system that automatically chases up late payments, or having it be a part of your process to get paid upfront.
If you’re just starting to be profitable or your business is growing, you might see more cash than usual flowing out the door, either because you’re catching up on overdue bills or loans or because you’re paying more in tax. Of course, the latter can be frustrating. We often have business owners come to us hoping for some quick tricks for how to lower their tax bills - and getting advice from an accountant is always better than seeking inexpert advice and risking noncompliance. But taxes are simply a part of business. They’re indicative of how much you’re growing, and we encourage a mindset of acceptance rather than resistance!
If you’re looking for more advice on growing your business, increasing your profits, and achieving financial literacy, check out our free downloadable guides.