Cash flow problems? It’s probably due to one of these reasons.
7 min read
This story originally appeared on Ellevate
In a recent post, I answered a question from a small-business owner not generating enough sales. But what if you have sales and are still not making enough money? Here's another comment I received:
I left corporate work in 2013 and created my solo consultancy. I have *not* reached my corporate salary (not even close) and while I’ve been incredibly successful in terms of business, clients, 80%+ client-referral, outcomes, A-lister clients, etc…the financial success is not there. I know every 'freelancer' and solo entrepreneur knows what I’m talking about. I’m now focusing and building strategy to grow my services business. I’m trying to remain open-minded to growth ideas that I rejected in the past.
Here are seven reasons your small business is not making enough money.
1. Current business area is lower-paying than previous corporate role.
This particular small-business owner is not making enough money when she compares her current consulting business to her previous corporate role — “I have *not* reached my corporate salary (not even close)” despite strong sales and clients results. However, this may not be a fair comparison.
A previous job might serve Fortune 50 clients, while the current business serves mom-and-pop businesses. A previous job might deliver long-term, multi-departmental projects, while the current business is a solo consultancy with smaller, discrete pieces of work. Make sure the money potential is there in your current business before you expect it to replace your previous corporate salary.
Depending on your financial obligations, you may not need to replace your salary. Compensation is not just monetary — there are psychic and lifestyle benefits that make up for the lower pay. However, if you do want to make more, then look at your revenue potential. If you charge by the hour, can you charge a high enough rate and book enough hours that you can replace or exceed your corporate salary?
2. Pricing is too low.
That said, if your current business is in a similar market as your previous corporate job and you are still not making enough money, this is a legitimate concern. You should expect to match, if not exceed, your former salary (after all, you are now taking on the risk of developing the business).
So, if you are doing similar work but not earning as much money, look at your pricing. You may be charging too little — a small price for a small shop, rather than a big price for a big company. You might have strong sales, but are you pricing high enough with each sale, or at least your average sale?
3. Costs are too high.
A consulting or services business typically doesn’t have as complicated (or high) a cost structure as a products business that has materials, manufacturing, storage and distribution costs. However, all businesses have costs, so when you are not making enough money, you have to review yours.
For example, my services business has costs, including office rent, accounting and legal fees, technology and equipment and travel and entertainment. If you have strong sales but don’t feel you’re making enough money, then your cost structure may be too high for the prices you are charging.
Do you need ongoing office space? Do you need that professional membership? Do you need that subscription? In the 10+ years I’ve been in business, I have pruned a number of support services that turned out not to return enough for the cost. Many of these services aren't too expensive on an individual basis, but in aggregate, they can impact your profits.
4. Volume or turnover is too slow.
Let’s say your costs are minimal and your pricing is in line with your market. Your profit seems high each time you make a sale, but you are still not making enough when you draw each week, month or quarter. Your individual sale might be just fine, but you are not making enough of them.
This particular reader is getting results and referrals, so not having enough volume isn’t a reflection of not doing a good job. It could be simply be caused by a long selling cycle or a conscious decision to not take on as much work. If it’s a conscious choice to limit your number of clients, then you have to charge a premium to each client. If your selling cycle is so long that you inadvertently limit the number of clients, then you have to focus on speeding up the process from the time a client hears of you until they decide to buy.
5. Pricing doesn’t include enough margin.
The unbillable time that you spend selling is a real cost that could mean the difference between a fat profit margin and not making enough money. Additional unbillable time that is necessary for your business includes time you spend on operations: keeping your books in order, invoicing and collecting payments, maintaining your website and maintaining your brand.
You need to account for all of these activities when you set your pricing to ensure that it has enough margin to cover not just executing the work, but all of your operations. Many small businesses' pricing does not include enough margin, either because the small-business owner only considers the hours they are actually executing the work or because they underestimate how much time is spent on these unbillable, but business-critical, activities.
Do you know how much time you are spending on what activities? Does your pricing account for all of your time?
6. Client targets are too low.
When you do come up with a price that accounts for all of your time, you might see that the breakeven price is much higher than you have been charging to date. You might fear that your clients will balk at paying this increase. This fear may be unfounded, because if clients have been happy thus far, they may not want to lose you.
You can increase prices gradually or offer payment plans — there are ways to negotiate a price increase so it’s more palatable. However, you might find that some of your clients are unable or unwilling to pay the higher prices. You need to build your business around clients who can pay the prices you need to hit your earnings target.
7. Offering is too small.
If your clients are right and your pricing is right, another area to review is your offering. I coached one design consultant who offered a range of services, from strategy to execution of a branding plan, and sold each step individually, as well as in a bundle.
However, the selling cycle for individual pieces was just as long as for the larger projects. This meant the margins were much smaller, and that she was better off focusing on the larger offerings. She could still take on smaller projects opportunistically, or refer these out and take a fee. You don’t have to say "yes" to every sale, because not every sale is of equal value.
If your small business is not making enough money, there are many levers to pull to improve its profitability. You need to know your numbers, from the unbillable time you are spending to the price of each individual offering. The small businesses I see struggle the most are ones that don’t have a concrete sense of their numbers.
Keep a time log. Review your historical sales for pricing, scope of project, client size, client mix and sales channel. Look for the areas that you can improve in your business based on the profit you want, as well as the psychic and lifestyle benefits you wish to retain.