2 Things Can Kill Your Profits
If your profits are not where you want them there is only 2 things that can be wrong – either you don’t have enough revenue and/or your expenses are too high! Sorry to make it so simple, but it is! Too frequently entrepreneurs overcomplicate the situation and avoid the real reason for profitability problems.
How do you figure out if your problem is revenue or expense related, or both? First, you need to assess how well your assets and resources are working for you. There are a number of good tools to help you accomplish this. I recommend something quick and simple to pinpoint key problems like the Revenue Engine Performance Checkup. Once you know where the problem(s) lie(s), there are only a handful of strategies you need to apply to fix them.
Revenue Problems that Impact Profitability
There are only 4 major root cause chokepoints that can restrict throughput in your revenue engine and casue profitability problems. The root-causes are:
- Production Capacity
- Sales Capacity
- Lead Generation
Any problem you experience along the revenue cycle is a symptom of one of these 4 areas. Fix it and the symtoms will disapear and cash flow increases for your business.
Fixing Production Capacity
Why is production capacity critical to revenue? Because it tells you how much you have available to sell. If you don’t know what your maximum capactiy is I recommend your read the blog post titled, Knowing Your Operational Capacity: Avoid Blowing Your Revenue Engine.
If you have capacity available the you need to develop a sales plan to sell it. Here is another good blog post to show you how to sell your execess capacity.
Fixing Your Pricing
You have a pricing problem if you don’t have excess capacity, but you still are not profitable. Think about it. If you don’t have anything to sell how do you make more money by selling more?
If you believe or your Revenue Engine Performance Checkup has told you there is a pricing problem, read the blog post Avoiding Price Problems That Can Kill Your Business. This will show you how to address fixing this potential root-cause to your profitability problem.
If you have capacity and you have sufficinet profitability built into your pricing, you’ve passed the first 2 tests. Now you know the probems is a sales or marketing issue. The first test is to determine how many sales you need to hit your revenue goal amd can you get there from here? If not, why not? Is it because your sales team is not big enough to do the volume to hit the goal? If this is the case, then you have to build your sales capacity. That means developing a sales plan, tools, and hiring the right people to help you accomplish the revenue goal.
If your sales team is spending too much time trying to find people to sell to then you don’t have a sales problem! You have a marketing problem. Small business owners frequently make this mistake. I wrote about this problem in the post title Sales Slump? Do You Have the Right Resources Assigned?
This symptom points directly to your marketing is not generating enough leads. This can be attributed to one of 3 things:
- You’re not spending enough time or money to reach your target market.
- You’re sending the wrong message to your target market.
- Or, you’re talking to the wrong target market all together.
If you’re not sure which situation might apply to you then I recommend deteremining your marketing effectiveness and marketing efficiency. These are revenue engine metrics that you should be monitoring weekly. Look at the full version of the Revenue Engine Performance Report to get a better idea of the marketing metrics you should be monitoring. Contact DE, Inc. if you need assistance with these calculations. Someone will be happy to assist you.
Cutting Expenses to Fix Profitability
Solving the expense side of the profitability equation is easy. That’s why most small business owners and entrepreneurs start here. The problem is if you do this first without understanding the revenue side of the equation you run the risk of cutting the wrong expense and making your profitability problem even worse. The post “Are Your Sales Down Because of Poor Decision Made Months Ago?” gives a good example of this situation
I recommend addressing expense problems by first assessing where you are overall like I showed you earlier.
- Use something like Revenue Engine Performance Checkup.to assess your current operation
- Review your results just like I showed you in the previous sections.
- Then make your expense cuts based on your root-cause revenue issues.
For example if you have too much production capacity based on your sales and marketing team’s capability then you should cut your operational expenses. If you have too much sales capacity (too many sales reps) for the number of leads you can afford to produce, cut sales staff. If your sales team can’t handle all the leads that are coming in, then cut back on marketing.
Where Do You Go From Here?
It should be appraent that this is a systematic process. If you understand the process you can tune it accordingly (Tuning Your Revenue Engine). Using this approach make it easy to set the objective and develop a transition plan to get there. In economic downturns clients that flow this recommended approach usually can withstand the impact. From a new and stable foundation it is far easier to begin gorwing your business once again.
So, now that you understand the process what do you do next? First, assess your current situation and determine the “root-cause” of your profitability issue. Next, apply the appropriate stratetgy to address the issue. If you need help applying the process our executive coaching services may be of use. Contact me if you’d like help in fixing your underperforming profitability.