Profitability is the lifeblood of any business. Once your company is up and running, you’ll want to become profitable as soon as possible. The faster your revenue exceeds your expenses, the easier it will be to navigate financial hardship and invest in your business’s growth.
Unfortunately, many small business owners find that reaching profitability is more difficult than they expected. A number of pitfalls can hamper your business’s profits and keep you in the red. Look out for these profitability challenges.
1. Lots of debt
The number-one detractor from a business’s profits is debt. Whether you took out a large loan to pay for startup expenses or are burdened by a tapped-out line of credit, debt can loom over your company for months—or even years. In most cases, debt must be repaid on a monthly basis, creating a recurring bill that adds to your business’s expenses. Once that debt is repaid, you’ll have that much more money at your disposal.
Business owners should first take a proactive approach to minimizing debt. Consider how much you can reasonably pay back based on your business’s sales projections and choose a funding method that aligns with that amount. Make a repayment plan with cash flow and profit in mind.
Existing business owners can approach existing debt smartly, too. Create a detailed budget that identifies your debt-to-income ratio. Then, develop a quick and responsible debt-repayment plan. This might mean trimming costs upfront to pay more toward your balance, or adjusting invoice terms to improve cash flow for easier on-time payments.
2. Unnecessary spending
Along with debt, many business owners discover that their profitability is zapped due to high overhead. The more your business spends, the less money in the bank.
Look over your monthly and quarterly expenses carefully. Are there any places where you can reducing spending or cut costs entirely? You might be paying for a software subscription your team doesn’t really use or can find a better deal on office supplies through a new vendor. Do you have an inventory management system that prohibits unnecessary on items you already have in stock? Storing and paying for items you don’t yet need have an impact on your bottomline.
3. Low business demand
There’s only so much you can do to trim your expenses. It’s equally important to look at the other side of the aisle – your revenue. Some businesses might be struggling to make a profit because they’re not bringing in enough money. A lot of this has to do with low demand for your products or services.
Customers might not be coming for a few different reasons. It’s possible they just don’t know about your business! In this case, you might consider increasing your marketing and advertising spend to get the word out. On the other hand, you might have a lot of competition in the market or your product isn’t the right fit for your target consumer. Do some additional market research and consider ways you can reposition your business to stand out and attract more customers.
4. Low productivity
Even with a great pricing strategy and sales volume, some business owners find that they’re spending too much on production to be profitable. The solution to this is to increase output without increasing expenses—AKA, improve productivity.
For example, you might want to upgrade to newer equipment that is more efficient and cost-effective. If your business is personnel-driven, consider adjusting employee processes to minimize lost time or mistakes that cost you extra money.
In many cases, you have to spend money to make money in business. But business owners must be smart about their spending strategies to ensure they can become profitable in the long term. If you’re in need of capital for your business, turn to the small business experts at Tenet Financial Group. Our team can help you with ways to infuse your business with capital and put you on the path to profitability.