Everyone is in business to make a profit, but not everyone ends up making as much as they thought they would. Most of the time, this has something to do with business owners having unrealistic expectations or getting their business plans wrong. If you have a business that you believe should be making more profit than it is, this article is for you. We’ve discussed below seven common reasons why businesses fetch small profits even when they seem to be performing as they should. Hopefully, you identify your problem on the list.
1. You’re spending too much on energy.
Energy is an expense that’s often overlooked. Most business owners acknowledge that their energy bills are high, but not many can tell why. Common reasons for high energy consumption include failure to regulate how some appliances such as air conditioners are used, misuse of ceiling fans and lights, use of old appliances, and lack of insulation. Sometimes, it has something to do with the business choosing the wrong energy suppliers. If fixing all the above vulnerabilities doesn’t fix your problem, then perhaps it’s time to switch electricity and gas suppliers for your business.
2. Failure to monitor the business’ inventory
Overstocking on products that move slowly is a common reason businesses make low profits. Once in a while, review your business inventory to check if there are large supplies of products that have decreased over time.
Acquiring loads of items without paying attention to their demand can increase the risk of loss of inventory through expiration, damage, and theft. Your business should have a wide variety, but your focus should be on the goods that sell and generate a decent profit for your company. You can manually track your inventory, especially if there’s not much to monitor, or use a digital inventory system. This won’t just give you a view of the movement of items in your inventory. It will help you understand important market patterns and make wiser decisions in the future.
Underpricing is an age-old technique used by startups and small businesses to grab the attention of buyers. While this strategy surely works in reeling in new business, it can hurt your profits if misused or done for too long. Avoid it as much as you can, and use the money to develop a comprehensive marketing campaign instead. If you have to underprice your products, ensure you’re actually not making losses or compromising your business objectives. Use net profits, not gross profits, in your calculations for a better understanding of the impact of underpricing.
4. Mixing business and personal accounts
Another common culprit is the heavily detrimental habit of keeping personal and business finances in the same account. The problem with this is that you can be deceived to believe you have plenty of money for personal expenses, when you’re actually eating into your company finances. Keeping separate accounts gives you a clear picture of each of your accounts and helps you track your business’ cash flow with more accuracy.
Another way business owners reduce their profitability is by failing to track their company’s performance changes. When a business owner doesn’t know when their business is doing well and when it’s not, they may continue taking out the same high amounts of money even when the company is struggling financially.
5. Having too many employees
Your workforce is what runs your company, but there are only so many people you can have on your payroll and still make a decent profit. Too many employees will increase your wage bill and significantly reduce your revenue. Business owners are advised to use technology to carry out repetitive mathematical tasks and hire independent contractors for services that are needed on an ad hoc basis, such as payroll management and IT consulting.
Avoid being too optimistic about the future, and bite off only what you can chew. If you have any expansion plans, increase your workforce only once you get there. Anything else is a gamble that can cripple your company.
6. Creating a damaging credit policy
Credit is a necessary evil in the corporate world. No one wants to give it, but you eventually have to because your competitors are doing it. While credit sure does simplify things for customers and enhance company reputation, it can impact the smooth running of daily operations, as it limits a business’ flow of liquid cash. When customers make big buys on credit, some operations may come to a standstill as you have to ensure utility bills are cleared, employees are paid, and more stock is acquired.
Before giving credit, ensure you have an expert-vetted credit strategy in place. There should be no apparent legal loopholes that customers can exploit, and the business should have a predetermined criterion to decide who can get credit and who can’t.
7. Expanding too soon
An increase in human traffic in your business premises may prompt you to launch an expansion plan that you hadn’t even planned for. That will fail nine times out of ten because of several reasons. Firstly, you’ll probably focus all your attention on the positives of the business and forget about the costs. That bigger office space and those new departments and employees will all need money, and your hope of raising it hinges on the optimism that the expansion will pay off. What if it doesn’t?
The thing is, relocating your business is almost bound to hurt your business, even if briefly. The new employees will also require time to gel and learn the company culture—something that’s likely to take a toll on your headway and reduce the ROI of your expansion.
The list of reasons businesses can’t see where their money is going is endless. The above seven are some of the most common ones. Note that the culprit behind your woes is more likely a combination of factors than just one reason. Try to assess your business from several angles to ensure your solution patches up as many shortcomings as possible.