7 Reasons Businesses Aren’t Profitable
As a business owner, do you find that no matter how hard you work every day or what new tools and technology you use, your business just isn’t profitable? It is easy to be so caught up in working in the business that you don’t see the extra operating costs, high overhead, or the downside to scaling too fast. It’s also likely you’re not on top of pricing (too low) and continue to use outdated accounting practices.
These are not a reflection of your intelligence or business acumen, they are a fact of life as a business owner — it can be hard to keep up with everything. An established company usually has its own momentum. However, there is a way to increase business profitability and cash flow, increase your personal income, and work fewer hours. But first, let’s look at the 7 reasons businesses aren’t profitable and see if you relate to any, then we’ll talk about solutions.
12 Steps Every Exit Plan Should Address
Is Your Business Profitable?
Research indicates that three out of five businesses are not profitable throughout the business lifetime. Which category do you fall into?
- 39% are profitable
- 30% breakeven
- 30% lose money
Business profitability doesn’t get discussed enough — if a business stays open, people assume it’s profitable, which is not the case. The bottom line is this: if your business doesn’t generate a profit (or at least cash flow), it isn’t sustainable. It also makes a business less sellable.
The corresponding side to profitability is cash flow. Clients often ask, “Why do I show a profit on my tax return, that can’t be, I don’t have any cash in my account.” Great question! We will cover that topic on another day.
“With financial knowledge and data come many opportunities to increase business profitability.”
The Top 7 Reasons Businesses Aren’t Profitable
#1 Reason Businesses Aren’t Profitable: Profitability is not a focus for the owner.
To some of you, this may seem strange. Yet many owners are so busy with the day-to-day minutiae of their business, they don’t pay attention to the financial side of the business. Does this sound familiar?
Do you only pay attention to the cash in your bank account, keep track of finances in your head, or glance at the books quarterly? This approach leaves so many opportunities for business improvement on the table. The biggest challenge here is seeing the value in changing the way your business operates. You are in business because you love the work you do, not necessarily running the business.
And don’t be fooled, this doesn’t only occur in smaller businesses. I have encountered several companies that do over $1 million in revenue that are still run in this fashion because it “seems” to be working. With financial knowledge and data come many opportunities to increase business profitability.
“Seeing the value in the way your business operates opens the door to greater profitability.”
#2 Reason Businesses Aren’t Profitable: Trying to spend all the money each year to avoid taxes.
At a site visit with a new client, we were walking the floor of his manufacturing company and he proudly showed me the entire room dedicated to extra equipment and vehicles that were purchased at various year-ends, so he didn’t have to show a profit and pay taxes. Yet, when I asked him to explain what he thought was one of his largest issues, he indicated he needed more cash flow to buy additional inventory. Although this example is extreme, many companies have variations of this issue. Having a long-term strategic plan keeps you from spending money on unneeded things and allocates the funds to meet your long-term objectives.
#3 Reason Businesses Aren’t Profitable: Scaling too quickly.
As companies focus on scaling, many times the owner isn’t aware of the costs associated with scaling. Additional hires, training costs, marketing improvements, new systems, training sales teams, additional inventory, etc. Having a detailed plan for scaling helps eliminate large fluctuations in cash outlay. Proper planning can also keep the stress and impact on the team to a minimum.
#4 Reason Businesses Aren’t Profitable: Unaware of which product or service lines are most profitable.
I had a client who increased his sales by 20% in one year, yet, at year’s end, he came to me dejected because he was showing a loss and didn’t understand why. He had encouraged his sales team to focus on selling one particular product. When we started digging into the numbers, we discovered that the product wasn’t profitable. He had no idea because there was no data to indicate which products were most profitable and which ones needed a price increase. To increase business profitability, it is important to track the right information with good data and use it to influence decision-making.
#5 Reason Businesses Aren’t Profitable: Not reviewing financials often enough and making changes accordingly.
Many business owners only review financial information quarterly, some even less often. When you analyze your financial situation monthly (or more frequently), you can make needed adjustments before it’s too late and profitability shrinks. Being proactive helps to reduce unnecessary costs and makes you aware of opportunities.
#6 Reason Businesses Aren’t Profitable: Not reviewing your processes and procedures.
Companies have unknown redundancies. How can this be? Each department typically handles its own piece of the pie and may not understand what is happening upstream and downstream. This creates excess costs and wastes time, not to mention the trickle-down effect on customer service. To avoid this, review your processes frequently, reduce manual labor with technology, create solid, data-driven systems and processes, and align your people to those systems and processes.
“Many smaller companies compete well with very large companies because they use technology to its fullest capabilites.”
#7 Reason Businesses Aren’t Profitable: Not taking advantage of new technology.
Today, many smaller companies compete well with very large companies because they are using technology to its fullest. CRMs, SaaS, dashboards, and digital marketing, for example, will make a big impact on reducing all seven of the reasons why businesses are not profitable. The right technology can vastly improve your bottom line and increase profitability.
One Solution to Increasing Business Profitability: Becoming Exit Ready
These seven reasons are common reasons why businesses aren’t as profitable as they could be, but they’re not the only reasons. Do any of these resonate with you or do you think there are other reasons why your business is not as profitable as it could be?
One holistic solution to improving business profitability is to work on becoming exit ready — even if you’re not exiting now or even in a few years. Becoming exit ready provides tools and strategies for proper planning using good data, learning how to work the plan, and using the information gathered to make good decisions, all leading to profitability and better cash flow.
Focusing on profitability is always very important so that when the time comes to exit (sometimes we must exit unexpectedly), you can get top dollar for your company. Potential buyers want to ensure that the business they are considering purchasing has adequate cash flow and is profitable. Typically, a buyer will ask for the previous three years’ financials to look for increasing revenue, increasing profits, and the potential for higher future earnings.
Plan for Profitability Now
Do you have a plan for how you can become more profitable? Do you prepare a budget and forecast each year? Are you proactive in your business? Do you wish you were more profitable, could work less, and have better cash flow? Feeling overwhelmed? That’s why IGX was founded. To help privately held and family-owned businesses, like yours, become profitable and exit-ready.
Since becoming exit ready involves strategic steps to becoming more profitable with greater cash flow and the discipline to get there, it’s best to work with a certified IGX exit planning advisor (CEPA®) who listens and understands your needs, gets everyone on your team on the same page (CPA, wealth advisor, lawyer, and others as needed), and digs deep to remove business, professional, and personal roadblocks to success.