382: Are you leaking profit through your overhead?

Well hello there!

Last time, we talked profitability and why aiming for a 20% profit margin is key to building a successful and financially robust business. Did you take any action and check your own numbers?

How far are you from 20%?

This week, I’m tackling one of the biggest mistakes I see business owners make: where their plan is to "grow into" their overhead to increase their profit margin.

This usually happens for one of three reasons:

1. Your revenue has dropped, but you're still carrying too many people for the work you have 
2. You’ve been running as a low profit business with too much cost and it’s become BAU
3. You’re hiring and investing ahead of planned growth in revenue

Either way, running with too much cost is going to leak profit and cash from your business, which can put you under financial pressure and limit your future options.

Let’s look at each one:

1) Your revenue has dropped, but you're still carrying too many people for the work you have 

It’s natural to think you’ll replace that lost income quickly - optimism always prevails!  And of course you don’t want to lose good people to only have to rehire when revenue picks up. 

But don’t make that decision on gut or emotion;  you need the figures, based on realistic pipeline and conservative scenario plans to show how long it will take to recover, and the impact on your profit. And make sure you have the excess cash to fund any losses you might make in the meantime.

I’ve been through this many times with clients, especially over the last few years. My advice; IF you’re confident revenue will recover quickly,  have the cash to fund the low profit or losses and you’re willing to use it, (whilst keeping taxes and 3 months overheads set aside of course!), then carry on but monitor the situation very closely. Have a threshold that you’re unwilling to cross, eg if forecast revenues are not £x by this time, we'll cut 2 heads. Having a clear plan will reduce that background stress.

2) You’ve been running as a low profit business with too much cost and it’s become BAU

This one is a bit of  a no brainer to be honest. I’m going to assume you’re not happy being a low profit business because it’ll be affecting your income, financial security and the future value of your business. And when your profit margins are slim, it takes just one setback to throw your business into financial stress. So you need to take action to increase your profit.

Whilst it’s a no-brainer, it doesn’t make it easy. If you’re serious about growing your profit, it’s time to dive into your numbers. Where’s the profit drag coming from and what scenarios can you come up with to boost it? 

Step back and look with fresh eyes; what costs are unnecessary, what overheads are not giving you a return. Then be prepared to make some tough choices - remember your future may depend on this.

If your plan is just to grow revenue, then be careful because growth brings new and unforeseen costs. So that extra profit you were hoping for could get eaten up.

3) You’re hiring and investing ahead of a planned growth in revenue

If you’ve got a super clear strategy, proven revenue streams and a strong sales and marketing plan, then it makes sense to build capability and capacity IF you’ve got the cash to fund it. Otherwise you risk depleting your profit and cash reserves, putting your business under financial pressure.

The danger zone is where you scale before you know you have a service or product with real demand, and without a clear sales and marketing plan to bring in the new revenue.

Here are some ways to scale without killing your profit:

• Be realistic about your growth goals - keep your revenue target realistic; aggressive targets are likely to leave you in a hole
• Stay lean; use flexible resources until your revenue justifies the increased overhead - this can help you meet immediate demand without locking you into long-term commitments that will drain your profit
• Phase your growth - don’t build overheads too far in advance of growth but increase overheads only when you’ve got sight of the revenue to support it
• Focus on margins, not just revenue; squeeze as much efficiency out of your existing resources as possible before adding new costs.
• Automate and systematise; invest in tech and systems that improve efficiency without needing to add more people. 

And whatever your situation, it’s a really great idea to review your overheads in detail at least quarterly.

The goal is long-term growth without the risk of burn-out or financial strain.

Your Action of the Week:

Take a look at your overheads. Are they out of sync with your level of revenue? Be brutally honest. If you’re resourced for future growth but your profit is too low it’s time to reassess. You’ll be surprised at the clarity you get  by seeing where your money is really going.

What can you do this week to start trimming unnecessary costs and protect your profit?

What’s Next:

Next week, I’m talking about my third obsession - Revenue Security - stay tuned!

Have a great week

Serena

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