As a small business owner, I spend much of my day talking with other business owners and managers of larger business. I have had this conversation hundreds of times:
Business Owner: “How’s business?”
Client: “Oh, we’re really busy. Putting in a lot of hours and everyone is working hard to get the orders out.”
We all know this is just a conversation starter, like, “How are you?” But, if it were a genuine conversation, which sometimes it is, the next question should be: “Are you making money?” In other words, are you busy and broke or busy and profitable?
Unfortunately, many small businesses end up in the “busy and broke” category. Activity and sales do not necessarily equate to profits.
How do businesses end up in this trap?
- Pricing products or services too low. At Kona Impact we work with hundreds of businesses a year and find that underpricing is far more prevalent than over-pricing. The business owner thinks –often mistakenly so—that his or her customers are extremely price-sensitive, so to keep customers and gain market share, prices are kept low. This is seldom the case. Customers are very service sensitive and great service will give you opportunities for better pricing.
- Wrong products. Kona Impact does make a lot of business cards a year—probably well over 150,000 cards a year—but we make almost no money off these. We do, however, hope that those who need business cards also need signs, websites and marketing help. These are the products that keep our lights on. Our product mix, overall, is profitable, but we do certainly have no or low margin products to introduce customers to us. If all we did was low-margin printing, we would certainly be busy and broke.
- Excessive costs. I see many entrepreneurs become intoxicated with the idea of being in business and as a consequence they spend, spend, spend on things that they do not need at that time. A fancy office is nice, but this means you start every month with a big expense. Maybe that old delivery truck can make it a few more years. Borrowing money creates a monthly obligation…..with interest. If you are not making money because of high expenses, think of reducing your overhead to put a little more in your pocket every month.
- “Friend and family discounts.” Sure, we all want to be known as nice people, especially in a small community like Kona, Hawaii. I like to say that I could give away over half of my time and materials if I said yes to every request I get from fundraisers, non-profits and people within my circle of friends and acquaintances. Long ago, we realized that saying yes to everything meant we would not be building a sustainable business. We do give away a lot, and we do offer discounted pricing to organizations we support, but we now do so much more selectively than in the past.
- Not working efficiently. This encompasses everything from equipment to work processes. If your machine is half as efficient as your competitor’s, you need to work it twice as hard to get the same output. If your employees are not well training and supported, you might be paying a lot for meager results. If an employee is not contributing meaningfully to the bottom line, put some effort into retraining, reassigning job duties, or if he or she is not a good fit, finding a replacement.
The solution to being busy and broke is to look at your products, pricing and processes to see where you can find greater efficiencies and opportunities.