It can be difficult for an owner to constantly turn a profit—even after being in business for several years. While your sales may be continuing to rise, there are many reasons why your net earnings aren't rising at the same rate.
If you're unsure of why your business isn't profitable, here are six questions to ask yourself:
1. Am I overspending?
- Symptom: Businesses, like consumers, can develop bad habits of spending more than they make.
- Solution: Look at where you're spending your money. Your operating ratio (the company's operating expenses as a percentage of revenue) shows operational efficiency. The lower, the better.
2. Am I undercharging?
- Symptom: Many businesses, especially those in service industries, are reluctant to raise their prices for fear of pricing themselves out of the market. The costs of running a business are constantly increasing due to rising minimum wage legislation and other economic factors.
- Solution: Scrutinizing profitability ratios of your company on a whole and by service line can provide insight into the optimal prices to charge your customers.
3. Did I scale up prematurely?
- Symptom: Business expansion before you're ready for it could lead to rushed financial decisions—decisions that are costly to correct later. Timing is key.
- Solution: An assessment of business expansion should include a review of both a cash flow statement (historical performance) and a realistic sales forecast (future performance).
4. Do I understand my financial position?
- Symptom: You receive financial data and maybe even a few reports from a bookkeeper or accountant, but you don't know how to interpret the data.
- Solution: At a minimum, each month, you should be receiving a balance sheet (a statement of liabilities and assets at a point in time) and an income statement (a statement financial activity over time). If you or your accountant are behind in your bookkeeping, you won't be able to analyze the data, find trends, or make adjustments.
5. Is my cash flow situation weak?
- Symptom: Businesses can quickly be in dire straights without proper cash flow management. If you need to borrow, banks typically require financial statements and cash flow forecasting.
- Solution: Preparing a cash flow forecast doesn't mean you'll always have cash, but it can identify a shortfall so you can plan ahead.
6. What are my high performing product(s)/service(s)?
- Symptom: You're unsure of your most and least profitable products or services.
- Solution: The income statement is a great place to see, month over month, if there's a particular product or service that works well or ones that don't. You can then adjust how you promote high performing services or products.
BDO can help
We work with businesses to help them determine why they're not turning a profit. Our Cloud Accounting team provides clients with industry-specific financial information tailored to their needs. Contact us to find out how we can help your business.