Seven Reasons Your Small Business Is Not Making Enough Money
In a recent Forbes post, I answered a question from a small business owner not generating enough sales. But what if you have sales but are still not making enough money?
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:
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 500 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 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 hour, can you charge a high enough rate and book enough hours that you can replace or exceed your corporate salary?
Pricing is too low
That said, if your current business is in a similar market than 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 all 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?
Costs are too high
A consulting 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 aren't making enough money, you have to review your costs. My services business for example, has costs including office rent, accounting and legal fees, technology and equipment costs and travel and entertainment costs. 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 weren’t too expensive on an individual basis but in aggregate these costs can impact your profits.
Volume or turnover is too slow
Let’s say your costs are minimal and your pricing is in line with your market, so 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're not making enough of them. This particular reader is getting results and referrals, so not enough volume isn’t a reflection of not doing a good job, but could be simply be a reflection of having a long-selling cycle or a conscious decision to not take on as much work. If it’s a conscious choice to limit the number of clients, then you have to charge a premium to each client. If your selling cycle is so long that you limit the number of clients inadvertently, then you have to focus on speeding up the process from the time a client hears of you until they decide to buy.
Pricing doesn’t include enough margin
This unbillable time that you spend selling is a real cost, and 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 your pricing has enough margin to cover not just executing the work, but covering your operations. Many small business' pricing doesn't include enough margin, either because the small business owner only considers the hours they're 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?
Client targets are too low
When you do come up with a price that accounts for all of your time, you will see that the breakeven price is much higher than you might 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 to date, 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 charge to hit your earnings target.
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. But the selling cycle for individual pieces was just as long as for the larger projects, so the margins were much smaller. She was better off focusing on the larger offerings. She could still take on smaller projects opportunistically, or she could 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.
As you can see, if your small business isn't making enough money, there are many levers to pull to improve its profitability. However, you need to know your numbers – from the unbillable time you are spending to the price of each individual offering. The small businesses that 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 lifestyle benefits you wish to retain.
Have more questions? Follow up with the expert herself.
Make a great living doing work you love
Founder - Dream Career Club
Being great in your career is not the same as being great at managing your career. This is why even smart, talented professionals, who get great results for their employers, don’t get these same great results for their own careers. I help people make a great living, doing work they love and have coached professionals from Amazon, Goldman Sachs, Google, McKinsey, Tesla, and other leading firms. Please get in touch if you want to design... Continue Reading
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