While there may be ample data on SMEs that do not make money, what should be done when that dull period actually strikes?
This is a question that leads to some further questions – to explain why the business does not make money and what pre-emptive measures could be taken to tackle it.
Let’s start by asking why a business may not be making money?
Does the market for SME even have money?
This is the first question you may have in mind. In times of severe economic crashes, which the global economy has seen a few times in the past few decades, there might be a reason enough for the lack of money in the market.
However, until you are selling a stable product or service in the market which is in demand, the market will always have the opportunity and the money for the same.
So, this one should be ruled out under current economic circumstances.
Is this service/good already available for free?
The first thought that may arise would be that the product/services you are offering are not upto the standard of the demand. However, if you have not received feedback that would chastise the quality of your products/services, your next search should be the availability of similar products/services in the market.
It is time for some thorough market research to find out if similar products/services are available for free or at subsidised prices. While you must concentrate on the price difference, also keep in mind to compare the quality in the process.
Is my product good enough?
Now here is a question that is subjective to a qualitative and quantitative research. Answering this question will involve a thorough understanding of the offered services/products, the quality, the time and resources invested, the purchasing capacity of your customer, price thresholds of similar products/services in market and the net profit margin you have set per sale.
This conglomerative study will help answer a question in depth.
Is my pricing too high?
While you perform the above mentioned conglomerative study in depth, you also come across a very interesting insight to your analysis, answering the question – is your pricing too high?
There is a definitive difference between your production/deliverance cost and the net profit margin. This in comparison with the standard market rates, can give you an insight to your pricing strategy and in which circle of pricing your products/services fall.
Is my revenue model broken?
This is an important health check for your business to conduct an analysis of your business model and gain insights to whether your model is making money or burning money faster than projected.
There are definite financial triggers even in the very initial days of running an SME pointing out at whether the revenue model needs fixing.
The factors you need to take into account at the stage of answering this question are: cash-flow, burn rate, customer acquisition cost, lifetime value of customer, current market aesthetics and your expenditure costs v/s revenue.
Do I have very narrow choices?
Consider if the top of your funnel is very narrow?
The funnel (if you may visualise) can be divided into the following:
The top of the funnel are the deciding factors of the scale of products/services, operations and marketing. This is where you first channel out what is the reach of your business. If the top of the funnel is narrow, it would be difficult to expect an exceptional turnaround during the initial stage of business. The niche the clientele, the less are the chances of success rate in early stages.
Move down to the middle of the funnel , where you have the customer acquisition cost, the burn rate and the revenue model. Once the filter from above is cleared, your choices flow down to evaluating the costs of acquiring customers, the rate at which you are burning cash and the revenue model you are following and whether it needs any evaluation and changes.
The bottom of the funnel is important to understand a long term effect of the activities in your business and the scale and growth of the business. This is where the returns flow out of the funnel.
Now that you have answered out these possible root causes of the business not making money, there are some pre-emptive measures that can be taken, while you are still in business and nearing the verge of not making money!
Pre-emptive measure 1: Have a plan!
You don’t need to sit with a laptop making heavy decks or make a complex analysis. All you need is a plan.
Evaluate Costs — Set up Goals — Links work activities with income — Make projections — Regular Healthy Business Model checks — Repeat the cycle
Pre-emptive measure 2 : Tracking the weekly work volume v/s income
A very important health check for the business while it is up and running. This should be your business lifestyle since day one.
Have a meeting set up with the managers of each team, your financial consultant and analyse the weekly report for the work volume versus the income generated.
Pre-emptive measure 3: Define work
You may, as the chief in execution of business, have a well and sound understanding of the work KPIs and definitions for yourself.
However, there is a need to define the work for your subordinates, staff, employees and set out a clear understanding of the work expectation from each resource of the company.
Pre-emptive measure 4: A weekly expense tracking
While it may be easy to lose track of expenses whilst running a business and having a steady cash flow, it is an important pre-emptive measure.
Most SMEs and startups end up losing money as there is a confusion between the stark difference in expense, income and cash flow.
Avoid that mistake. Have a weekly meeting with your financial consultant and review your budget, expenses and income weekly.
Pre-emptive measure 5: Monthly progress tracking
While most businesses today are adapting to the new culture and business ethics, and avoiding the stereotypes; monthly progress tracking is one orthodox business value you do not want to lose out on.
Find innovative ways to engage your employees and resources and inculcate a system of monthly progress tracking against the goals allotted and the future potential of these resources you invest in.
Before your business runs out of money or stops making money, make the necessary changes and enhance the efficiency of your business!