3 reasons why your business is not profitable

If your business constantly requires more and more new investments in order to stay afloat, know that this is not normal and the situation needs to be corrected. In my two years in financial consulting, I have talked to a bunch of entrepreneurs who are suffering from this problem. In 2015, I myself got out of such a troubled business with a debt of 1.5 million rubles.

Businesses are different, but the problems are the same - and far from always they consist in the fact that the product is bad. I will tell you about the three most common mistakes due to which your business does not make money.

Common mistakes entrepreneurs make

1. You think that all the money of the business is yours

Entrepreneurs often live with the attitude "I = business, company cash register = my wallet." If they want to go on vacation, they take it from the box office. You need to refuel the car - they go to the cashier again. They are the owners, so you can.

In fact, you can't.

The money you have in your checkout or checking account is not necessarily yours.

If you work on a prepaid basis, it can easily be customer money, and you are already spending it, although you have not fulfilled your obligation yet. For example, you create websites, spent an advance payment, and the client changed his mind and asked for money back. There is nothing to return.

Or you will need this money in the future. For example, on the 10th you took money from the cash register for a new phone, and on the 20th you have to pay salaries to employees. Some of them will be left without a salary, because you bought a phone with someone else's money.

2. You are chasing more sales

The concept of profit is held in high school in social studies. But entrepreneurs, adults, seem to forget about it - and evaluate their business by the amount of money in the current account. Indeed, they are easier to count than profit. Only they don't say anything about the efficiency of work.

For example, an entrepreneur sold 300 belts per month with an average check of 3,000 rubles. I multiplied the numbers and got 900,000 rubles. After that, he will deduct the purchase price at most - say, 300,000 rubles remain. Seems to be OK. Has earned, is happy.

And if you subtract the salaries of sellers, transportation of goods, rental of premises, marketing costs, taxes, you get not 300,000 rubles, but minus 50,000 rubles.

But all this is boring and difficult to consider, it is better to learn marketing and sell twice as many belts. There will be as much as 1,800,000 rubles. True, the loss will become even greater due to the increased costs. But who cares?

3. Can't quantify management decisions

Every action in business must be judged through the prism of profit. There are no good and bad management decisions, there are profitable and unprofitable ones. But entrepreneurs do not calculate the effect that their actions bring.

Are you going to increase your conversion? Build a sales funnel and see how much revenue and profit this will ultimately result in. Do you want to automate business processes? Estimate how much time your employees will have. Then think about whether this time can be spent more profitably.

For example, you have a store with one cashier that, on average, serves one customer in 30 seconds. You've automated sales, and now the cashier spends 15 seconds on a customer. But does it make sense? If there are queues at the store, then yes. People will stop being nervous and leave, sales will increase. Next, you need to calculate how much more and when this increase will pay off the automation.

And if there were no queues, then no automation will bring any benefit. Unless the cashier will sit idle a little more.

Of course, you don't need to fanatically calculate the effect of rearranging the cash register by 3 centimeters to the left. But the key decisions in which you invest time and money are necessary.

How to avoid such situations

1. Take money from the business for yourself in accordance with your roles

Most likely, you have two of them: the owner and the director. The owner is entitled to dividends from profits. Determine what percentage of the profits you will take for yourself, and stick to that number. The director is entitled to a salary. Look at how much directors are making and set yourself the same.

Dividends and the director's salary are yours. Everything else is business.

2. Remember that an increase in revenue is not always an increase in profits

Open any book on economics. It says: with an increase in the volume of sales, the price falls and the costs per unit of goods rise. It so happens that one sells 10,000 units of goods per month and works at a loss, while the other sells 1,000 units - and in chocolate. Increase your sales only as long as it gives you an increase in profits.

3. Make a financial model when you plan to change something in the business

A financial model is a table that shows how a change in one indicator affects all the others, including the most important one - net profit. It is easy to understand from it whether you should work on this or that indicator or it is ineffective.

An example of a financial model →

conclusions

The problem with entrepreneurs is what I call the absurdity of doing. A person works 14 hours a day, always comes up with something, solves some problems. With this approach, the process comes to the fore, not the result. I do, I do, but I don’t know what it gives.

I am for a different approach.

The main indicator that a business is working effectively is not the number of actions, but the profit. Every action should lead to profit. And you need to evaluate each action in terms of how it increased profits.

And in order to evaluate a business through the prism of profit, you need to keep financial records: to know the resources of the business, key indicators and levers of growth. For more information on what financial accounting is and why an entrepreneur needs it, read our previous article.