Why Is Your Small Business Not As Profitable As It Could Be?

small business strategiesRunning a small business can be challenging, fun, profitable and life changing. We all have different reasons for going into business. I believe I can say that one of the reasons might be to make a better income than working in a job. Then why do so many small businesses struggle to deliver the very result we expected when we ventured down the entrepreneurial path?

The answer to this is not, unfortunately, as easy as saying “Here, do this one thing and all will be fine”.

A business is made up of many moving parts and understanding these parts, and how they interact, is critical to your success. This article addresses some of the major items for you, as a business owner, to review and improve on.

Hourly Rate Calculator

If you are running a service based business then, essentially, you are trading your time for dollars. Part of your business model should include reference to an hourly rate calculator (HRC). This simple tool (spreadsheet) can help you define the minimum dollar amount you can charge for your time to cover materials, overheads and make a profit.

Input into the HRC consists of:

  • Your desired revenue
  • Your target income/profit
  • The cost of goods (if applicable)
  • Your overheads
  • How many hours in a year you have available to bill
  • How many resources are available for billable work
  • An estimate of how much administrative down time is involved

 Lead Generation

Most business owners think that all they need to do to make a profit is to generate a lot of leads. This is partly true. Are those leads quality leads? By quality I mean:

  • Are they leads that are really interested in what you have to offer?
  • Do they have money to spend now?
  • Do they have the authority to spend that money?
  • Are they the right people to be talking to?

If you improve the quality of your leads, the probability of actually making a sale increases. So your conversion rates could increase significantly. It’s all about quality leads converting into sales. Measure how many leads you get and document where they came from. Did they come from networking, advertisements, flyers referrals or your website?

Conversion Rate

I have seen businesses that generate a lot of leads but their conversion rate to sales is very low. This means lots of money, time and effort spent on marketing to pull in those leads only to have 80% of them fail to become customers.

Conversion rate improvement can be achieved by examining how you build your “Know, Like and Trust” factors  throughout your marketing and  sales process. Ask yourself:

  • Have I crafted value packed offers/solutions to match customer needs?
  • Do I obtain and feature testimonials in my marketing materials?
  • Do I offer value and educate my prospects on how my services benefit them?
  • Do I understand my potential customers needs, wants and expectations?
  • Have I created answers to their biggest objections for doing business with me?
  • Have I made it easy for them to do business with me?

Measure your conversion rate (Leads/Sales). If you get 100 leads and they are converted to 20 sales, then you have a 20% conversion rate. Your challenge is to increase your conversion rate. If you double your conversion rate, you have just doubled your sales from the same number of leads.

Now, are those sales profitable?

Profit

Knowing what it costs to deliver a product or service is also critical to your profits. Revenue does not equal profit. Cast your eye over your Profit and Loss figures and look at sales minus overheads. Is this figure positive or negative?

Remember the Hourly Rate Calculator? One of the main indicators produced by the calculator would be how many hours of billable time you have available at a target dollar rate. You can compare how many billable hours you “sold” during your P&L reporting period (say a month) with how many you require to make a profit.

If you are not utilizing your time efficiently or sales are low, then the amount of billed hours will be low. This can be a a combination of both (low sales & low productivity). Do you know how much revenue you need to break even each week?

Productivity

How you utilize your time each and every day has a large impact on how successful you will be. This becomes even more critical if there are employees involved. The more employees, the easier it is to burn time and profits in non profitable activity.

The first step is to measure your own productivity by dividing how many hours you work each day into your revenue for the day. Do this for a week. This will give you a idea of what you are earning an hour. Compare this to your ideal hourly rate.

Improving your productivity can be achieved by reviewing how you deliver your services.

  • Can you reduce how long it takes to actually deliver a service?
  • Can you reduce or remove travel time?
  • Can you leverage technology to improve how tasks are performed?
  • How can you outsource busy, non billable activities?

Product Mix

The types and levels of service/product you offer can vary to match the needs of your prospects. If you only have one thing to offer then you are missing out on a huge opportunity. Always have multiple products or services to offer as up sells or down sells.

Some products or services are complimentary to a core service and can be bundled with it to layer value and create “packages” that are irresistible to prospects (and existing customers).

Knowing what it costs to deliver a product or service is also critical to your profits. Are you promoting and offering your most profitable services, or easy to sell services that are not profitable? If it is the latter, then you’ll see lots of revenue but no profit!

 

 

About the Author Brian

Brian helps small business owners win back their time, passion and performance utilizing a proven step by step blueprint for success. A coach and consultant for over 10 years specializing in business growth strategies.