Achieving Profitability and Staying Profitable
Business Plan Guide Article No. 9
What will you do to achieve profitability and stay profitable? (Achieving profitability and staying profitable)
The part about doing business that is harder than starting a business is keeping it going. Let’s face it! Trends pass, people get bored of the same thing over and over, people always want new and exciting. That’s just in our nature. So the question to ask, how will a business continue to be profitable in times of change, growth, or declining sales?
Well, a lot has been said in the previous sections of the Business Plan Guide regarding planning and strategy. Other sections have focused on the product life cycle, marketing strategies that appeal to different markets, and production methods that can easily fluctuate with market changes. Now in the grand picture of it all, how will this new business continue to maintain a profit?
See, as the business grows and ages, more and more expenses will be incurred, and a lot of those expenses may not be directly tied to income generating expenses. As administrative processes that govern and manage the business get more complex and bigger, the expense of those processes also grows, and, often, those expenses don’t bring in a return. Let’s take insurance for example, Insurance is a fixed income that is fixed on a step function. This means the expense is fixed for a certain range of business operations. When business goes beyond that range, the fixed income increases for a new range of business operations. It will not just be insurance that increases! It’ll be expenses on the fixed level and variable level. This may sound like this only applies to large corporate giants, but it doesn’t. This actually is more of an issue for small businesses that don’t have available capital to bail them out when an expansion phase goes wrong.
If a small business starts as a one man or one woman show, the first employee will take a very large portion of revenues, and expenses will significantly change. Often times, the first worker, or owner, will have to work at more than 100% capacity to be able to take on an employee. Even after the first employee, both the first worker and the first employee will have to work beyond 100% capacity before a third laborer is brought into the picture. The question to ask when setting up a business, will working at close to 100% capacity or beyond 100% capacity be able to bring on board another worker? A better question is, at what capacity of business operations will a business be able to afford another worker, and at what point does a business have to lay off a worker? Consider reading our article on The Cost of Human Labor to get an idea how much an hour of human labor costs a business. It’s not cheap!
Of course it’s always great to plan when business is good. It’s nice to aspire and dream of when a one man business becomes a prosperous corporate giant much like Michael Dell became Dell Computers. Even though nobody likes to consider the worst, it is such a good feeling to have a plan for the worst. The security of knowing that something was thought of when business ideas, procedures, decisions, processes, etc. fluke is nice to have when those moments come. Even Google has had bad days. Costco Wholesale, which is a corporate beast in the retail and wholesale industry, had a really rough start. The idea of having to pay a membership fee to shop at a store was just preposterous! Seriously, it’s a free country, isn’t it? Anyone should have the right to shop there! Well, Costco struggled, but it is now a giant hairy monster of a business that is solid in its profitability. The point here is have a plan to down size, shift gears, to be persistent, aggressive, take risk, but most of all, have a plan to plan and have a strategy to strategize moves.
Wishing you much success,
Sergio with the iBrand Your Business Team