In our previous blog we wrote about how important profits are to the growth and success of your business. To read our previous blog, Profit Is Not a Dirty Word, click here.
The reality is your business will have periods when it is not profitable and is making a financial loss. This can be caused by a number of situations; for example:
- You lose a major client
- Your business sector has a major economic melt down
- You make a costly mistake
When this happens the key to your success is quick action; don’t assume it will correct itself because it won’t! And the quick action must be focused on three areas:
1. Increase revenue
2. Decrease expenses
3. Combination of the two; increase revenue and decrease expenses
1. Increase revenue
There are multiple ways to increase your revenue. Here are three:
- Increase the price of your products or services. This strategy always scares business owners because there is a belief that an increase will cause you to lose customers. Our experience with our clients is that a reasonable increase, say 2%, has no effect on client retention. And it increases your revenue by 2%!
- Sell more to existing customers. To read our blog on how to generate more revenue from existing clients click here.
- Find new clients. While this is the preferred strategy for a growing business, if your sales cycle is long then the results can take a while to turn the loss into a profit. Also keep in mind that an increase in new clients can cause an increase in expenses to serve those new clients.
2. Decrease expenses
When you turn your attention to the company’s expenses remember there are ALWAYS ways of decreasing expenses. Nothing is sacrosanct, except the survival of your business. So consider the following:
- Follow the 80/20 rule. Review those expenses that make up 80% of the total expenses; they probably number about 20% of your expense categories. By focusing on these you can get quick wins.
- When unexpected but essential costs do arise find the money elsewhere. For example, if your IT systems are down because of a broken server you have to buy a new server quickly. Find the cost of the new server from a future planned expense; say a winter conference in Florida. Put the conference off for another time and use that money for your new server!
- If the financial losses are deep and long lasting you have to consider laying people off. This is never the desired route but your responsibility is to the health and survival of your business and if that means you can decrease your people costs without hurting your customers then you must consider it.
3. Combination of both
This is by far the preferred strategy because it will result in a faster and more sustainable return to profits.
So next time your business is making a loss …. ACT NOW!
Take 2 minutes to listen to our audio on how to manage your cash flow; click here to listen.
