When you start a company, profit is not your end goal. You want to stand out in the crowd, attract and retain customers. With revenue growth in mind, you splurge on marketing, product placement, and quality, offering products/ services at an irresistible price. These efforts can help grow revenue and establish a strong market presence. As sales grow, economies of scale should kick in, and your startup will report a profit. While there could be seasonal profitability, expenses outweigh revenue, and startups face a cash crunch. Eventually, they fail to secure another round of funding and dissolve.
Does the above scenario describe your situation? Then this article is for you. Before your startup sees its end, give profitability the attention it needs. Remember, a successful business is one that can strike a balance between growth and profit.
What Can Startups Do to Improve Business Profitability
Running a startup is more than just fieldwork. No matter how good you are at customer relations or product design, if you don’t monitor those performance numbers, profits will remain a far-fetched dream. As a business owner, you can make the following numbers work for you.
Make Custom Reports of Business Key Performance Indicators
Nobody knows your business better than you. Your business values and objectives define what success means to you. Take time to identify the key performance indicators (KPIs) that can quantify your business performance. You can refer to industry KPIs, such as average revenue per user (ARPU), average recurring revenue (ARR), gross merchandise volume (GMV), and earnings before interest, taxes, depreciation, and amortization (EBITDA).
Even if your business is not profitable, growth and consistency in KPIs will tell you if the company is on the right path. You can compare these KPIs with those of your competitors, analyze the point at which they became profitable, and set measurable goals.
The standard financial statements and tax reporting, which accountants make, will not give you such KPIs. This needs strategic planning and business understanding, which a chief financial officer (CFO) brings to the table.
Break Down Revenues and Costs
KPI’s will measure the overall performance of the business. If you have multiple product lines, distribution channels, and customer segments, you can get the revenue and operating costs of each segment.
Every company has a few products or channels that are more profit-generating than others. The bifurcation of revenue and cost will help you understand the trade-off.
Some product lines may take time to perform, and certain distribution channels may perform well with specific customer segments and product lines. You can mix and match and see which combination works best. For instance, data analysis may reveal to a grocery store owner that smaller packets sell more online and larger packages sell more in-store. Such data can help you optimize inventory and logistics by focusing on high-selling products on the correct channels.
You could consider offering complementary products to boost order volumes. For instance, a baker could bundle coffee and pastry for in-store customers, thereby boosting sales without incurring additional marketing costs.
The cost and revenuecan also help you identify underperforming channels, product lines, or customer segments. You can either close them or try to improve their performance through product bundling or tweaking the channel-product-customer combination. A CFO is well-versed in using such reports to generate results.
Reduce Cost Without Affecting Your Goodwill
Business owners can segregate costs into fixed (rent, salary, utility, marketing) and variable (raw material, production, shipping), and divide them per unit. Suppose your fixed cost is $20,000 and you sell 10,000 products a month. The variable cost per unit is $15. Ensure your product pricing includes the $2 fixed cost. If you are competitively priced, high fixed costs could be eating up your profits. You could look for ways to reduce that cost.
Here are some strategies to reduce fixed costs:
- Scouting for contract workers and merchants (payment providers) that offer better deals
- Automating entry-level tasks
- Empowering employees by rewarding productivity with bonuses
- Tweaking the workflow to improve productivity
The cost reduction should be a win-win situation for customers, employees, and vendors. You do not want to squeeze them dry of their money, work hours, and profits. Many owner managed businesses compromise on product quality, set unrealistic targets for employees, and demand unfeasible discounts from vendors. Such activities can earn short-term profit. However, such profit is not sustainable, as frustration, stress, and customer dissatisfaction hurt revenue.
Eliminate Unnecessary Reports and Automate Necessary Reports
Preparing all the above reports can overwhelm employees and consume their productive time, ultimately undermining the purpose of these reports. Remember, you want them to focus more on revenue-generating work. A good strategy is to appoint a special task force (of existing employees reasonable with reporting) temporarily and work closely with them to prepare the reports. Use technology to automate these reports. Employees can perform their daily work, updating numbers as part of their usual work process, and the software will automatically update the dashboard and generate daily, weekly, and monthly reports.
Also, clean up the various reports that you no longer use to streamline reporting.
What Does a CFO Bring To the Table?
Many startup founders often take the DIY route, learning from YouTube videos or attending short-term finance courses. They believe that reports generated by accounting or data analytics software are enough to develop and execute strategic financial plans. Founders are hesitant to invest a significant amount in hiring a CFO, thereby missing out on an opportunity to revive the business.
Reports and numbers are just tools the CFO uses. The real skill is reading these reports from a business and finance point of view and arriving at a well-balanced strategy that gives results.
Remember what we said at the beginning of the article: balancing growth and profits is what helps a business survive and thrive. Cost-cutting should not compromise quality, and growth targets should not result in customers spending more than necessary.
To bring this balance, a CFO takes a 360-degree view of the company, the market, and the macro environment. He/she prepares a strategic plan which may include things the business needs the most. It could be an investment case to secure additional funding, a budget for each department/product, performance KPIs, financial targets, a roadmap to reach the target, or a combination of these.
Contact Black and Gill LLP in Toronto To Help You Improve Your Startup’s Profitability
You can start by consulting a fractional CFO who can help you with a specific objective, such as improving profitability, fundraising, or debt restructuring. Once your startup’s financial health improves, you can extend the service scope. At Black and Gill LLP, our CFOs provide services to support your startup’s cash flow and finances, whether you need partial or complete support. To learn more about how Black and Gill LLP can offer you with CFO expertise, contact us online or call us at 416-477-7681.