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Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds nought and six, result misery.
— Mr. Micawber in Charles Dickens’ David Copperfield
By some estimates, 50 percent of all small businesses fail within the first year, and fewer than 1 in 10 is likely to survive 10 years. Why? A major reason is that they fail to earn a profit. Small Business Trends reports only 40 percent of U.S. small businesses are profitable, while 30 percent break even and 30 percent continue to lose money year after year. If your firm is not making a profit (i.e., netting more income than expenses), here’s what you can do to turn it around.
In this episode, Gail and Erin discuss the following important tips:
- You need to have a plan. How are you going to make money?
- You have to enough capital in the bank to cover operating costs for at least 12 months, as a safeguard against downturns in business.
- Put together a budget.
In today’s episode, Gail and Erin discuss adjusting your business model when you see that your current model isn’t working. “You can tell pretty quickly whether your model is working by reviewing the bottom line on your monthly profit and loss statement. If you’re losing money month after month, something is wrong and you have to fix it.” Says Gail.
How much profit should you be earning? A recent report, Gail notes, shows the current industry average is around 8 percent, down from 10 percent a year or two ago. Gail and Erin suggest you should be earning at least 10 percent net profit, and somewhere between 10 and 20 percent is good.
From their experience working with clients to improve their businesses, Gail and Erin have come across quite a few firms that are not earning a profit. Two areas in particular that erode profitability are high operating costs and not knowing how to price services properly. They explain how to correct those and describe the various components that make up a successful business model.
Crucial to the success of any business is knowing who you want to work with and why they would want to work with you. If you’re not clear about that, you need to listen to your clients. They will tell you what they want and what they need. Keep in mind that you need to serve that client in the way they want to be served. Don’t work with clients who don’t value you or your services, but be flexible in how you work with each client.
To get more tips on developing and adjusting your business model, listen to the full podcast.
Mentioned in This Podcast
For more statistics on why small businesses often fail, check out this infographic from Small Business Trends: https://smallbiztrends.com/2013/03/infographic-failed-small-businesses.html