It may seem obvious but it’s an important fact. A company won’t remain in business without eventually turning a profit. Every year, there are thousands of new businesses started with lofty aspirations. They feel excited and full of hope about the prospect of success. But plenty of statistics show that more than half of them will be gone in less than five years. The reason: they struggle to make a profit.
Investopedia defines “business” as an organized effort to gain a profit. Profitability impacts whether a company can secure bank financing, attract investors and sustain itself. Profit is an indicator that things are working in a business so when it’s absent, you need to understand the reasons why the business is not making enough money. According to a U.S. Bank study, a whopping 82% of businesses failed because of poor cash flow.
Common Reasons Why A Business Struggle to Make a Profit
There are seven major problems that prevent businesses from being profitable, according to Jayson DeMers in his Entrepreneur article:
Wrong Pricing Strategy
Setting prices is a critical component of product profitability. Understanding how a product fits into the overall market is important. Is it a premium product where you can charge more but risk lower volumes. Are you trying to win on volume by setting prices lower than the competition? However you price the product, it’s important to understand your margins. How much does it cost to produce, market, and sell and then what’s left over at the end? Many companies price their products too low under the allusion of seeing sales success only to find out sales aren’t covering costs.
How to fix it: Know your business expenses and your target revenue. Using this, consider your margins carefully. Don’t be afraid to charge for quality. If you make your product better and bring real value, people are willing to pay more.
Too Much Overhead Expenses
Most entrepreneurs don’t have a background in finance. When the business gets started, they focus more on bringing in sales and serving the customers. They neglect record keeping and financial planning. Moreover, many companies struggle to reduce overhead cost because everything feels essential.
According to Business Encyclopedia “Overhead costs, often referred to as overhead or operating expenses, refer to those expenses associated with running a business that can’t be linked to creating or producing a product or service. They are the expenses the business incurs to stay in business, regardless of its success level.”
How to fix it: To stay competitive, you need to make sure that your overhead is as low as possible. Carefully consider adding employees, monitor your expenses, and encourage a thrifty culture. Employees generally don’t like to be wasteful so encourage their participation in cost-saving initiatives. Getting into the habit of being cost-effective will give your company a room for growth.
Unseen or Hidden Costs
Running a business isn’t cheap or easy. In addition to the regular expenses, there are a number of unseen or hidden costs. You may have calculated your employee’s salary but failed to account for their taxes, benefits, and perks. You may have a solid expense plan but run into an emergency repair or major equipment replacement. Little unexpected surprises can add up to big expense overruns.
How to fix it: Be sure to account for taxes, benefits, and perks in doing a budget plan. Have a contingency fund for repairs and unexpected expenses When planning a budget, estimate an additional 25% to be used for these hidden costs.
It’s possible your expenses are in order but the market competition is tough. Your product may be too costly or not perceived as better than your competitors offering. Sometimes it’s just hard to get noticed, especially when going up against strong competitors. Understanding the dynamics of the marketplace can make both your company and products stronger as long as you’re nimble and adjust quickly.
How to fix it: Your best option may be to pivot. Validate a better business idea that more strongly addresses a market need. If you’ve built an audience but they are not buying your product, flip it around and create a product for your audience. Reverse your strategy and design a product perfect for your engaged followers. Conduct customer interviews to understand their underserved needs. In that way, you will learn how to improve your offerings to serve them better.
Lack of Market Awareness
One of the most common challenges in building your brand is the lack of market awareness that your solution exists. Stiff market competition may have drowned out your brand. You might also be investing in the wrong marketing strategy or not have one at all. Even if your product is at an ideal price, you still might not generate a profit if no one knows it exists.
How to fix it: Your brand should start and end with consumer engagement. Always create a presence where your customers are active. Social media is an option that provides a channel where your customer can ask questions. Encourage your team to interact with them to gain valuable insights into their needs. Research the right channels where your brand can get the most attention. Whatever you decide, make sure to invest in a marketing strategy. Marketing will cost a bit up front but can pay big dividends if planned properly.
The younger the company, the more inconsistency. At the start of the business, owners have many things to worry about and putting policies in place is usually a low priority. Pay scales may have no rhyme or reason. Expenses may swing enormously or your sales team perform unpredictably. Inconsistency can lead to problems the business can’t afford. Budget planning is especially difficult in an environment where income and expenses swing wildly from month to month.
How to fix: An entrepreneur needs to put policies in place from the get-go that they are going to follow consistently. It doesn’t mean that the process can’t change. It means that the company needs a guide for handling situations. If there are still inconsistencies, iron them out quickly. The more you can track and analyze business data and metrics, the fewer things you’ll be surprised by. Getting consistency is an important step if you want your profit is to remain reliable.
Inability to Track Cash Flow
As previously mentioned, a business owner might be overwhelmed in bringing in business and serving the customers. They might not have a good grip on the finances – no idea how to manage an income statement or monitor cash flow. They might have the wrong notion of thinking profit simply as cash flows. In such cases, you could have a positive income but negative cash flow.
How to fix it: Ideally, you should understand both your cash flow and income. It’s critical in order to pay the bills and your employees this month. See to it that you update your cash flow and income statement every Monday. Knowing your financial status at the beginning of the week will give you an idea of the targets you need to achieve. If possible, hire an accountant to maintain the books and make sure the numbers are adding up.
Take these problems one at a time. Your struggle for profit always has a solution – or at least an improvement. There are ways to increase profit for your business.