While there are some statistics that can be interpreted in many different ways, there are others that are far less ambiguous.
Take the fact that, according to Bloomberg, eight out of ten entrepreneurs who start businesses fail within the first 18 months. This offers a clear insight into the numerous challenges facing young and inexperienced entrepreneurs, especially those that operate in a competitive marketplace.
One of the biggest challenges facing budding entrepreneurs is a fundamental lack of understanding surrounding the core relationship between turnover and profit. The former means nothing if it does not generate the latter, for example, and commercial growth should be based on driving higher profit margins rather than inflated turnovers.
How to Drive Higher Profit Margins as You Expand Your Business
The critical thing to remember is that your business venture has an established cost base, which impacts on the amount of money that you make on every single transaction. So, while inexperienced business owners often focus on driving a high volume of sales in the name of growth, this may prove ineffective if they have failed to determine a precise cost base and the margin that they are making on each sale. Instead, it is far better to focus on minimising nonessential costs wherever possible, so long as this does not impact negatively on productivity or quality.
Consider the following steps towards achieving this:
Recruit Forensically and Consider Flexible Staffing Solutions
One of the biggest cost bases associated with small business ventures is staffing, as each individual employee will command a fixed salary and additional amounts in insurance, pension payments and healthcare benefits. Even if you only employee a single member of staff on the terms of a minimum wage, you will have to pay out an annual salary of £13,124 ($20,212) in addition to thousands more on supplementary provisions. To negate this, you will need to grow your business logically and only embellish the workforce if it has the potential to improve profitability.
The first step towards achieving this is to adopt a forensic approach to recruitment, and attribute a financial value to the productivity of each individual employee. This must be reviewed regularly and as the business evolves, but it will at least enable you to monetise productivity and determine whether you can afford to hire additional staff members or not. To simplify this process in the short-term, you should commit to employing talented temporary and short-term staff on the basis of individual projects, as this helps to optimise productivity and reduce costs significantly.
See also: The First Five Hires you Must Consider for your Small Business Start-up
Invest in Temporary Structural Solutions as Your Business Grows
Given the obsession for growth and driving a higher turnover, inexperienced entrepreneurs often look to expand their business at an unnatural and unsustainable rate. The main issue with this is that it often sends costs spiralling at a disproportionate rate to turnover, squeezing margins and reducing profitability over time. This often occurs as businesses first begin to experience growth, especially as they take on new members of staff and outgrow their existing premises.
Even as your business expands, it is important to ensure that this growth is built on solid foundations. This takes time, however, so you must find a way of extending your workspace without committing to a costly, long-term lease at a new location. The best way to achieve this is to secure temporary work and floor space, which is readily available in a range of designs through outlets such as Neptunus. This enables you to grow your business tentatively in an affordable manner, without taking on the burden of long-term costs.
Cut Unnecessary Marketing Costs
When you consider the rates associated with television and pay-per-click (PPC) advertising, it stands to reason that marketing should have a sizeable cost base. This is at least easy to translate into an accurate financial sum, however, and can therefore be measured against the revenue and profit that it generates. It is still a good idea to reduce costs by embracing modern marketing methods, however, as the evolution of social media and power of customer reviews have changed the industry and how businesses promote themselves. The construction sector is a good example of this with tradesmen now connecting with customers through independent websites and relying on positive reviews to develop a positive reputation.
This offers a template for any business, with customer service now a central factor in promoting brands in an organic and authentic manner. To achieve this, you should consider aligning your customer service and marketing departments, driving the effectiveness of your output and reducing your cumulative cost base in the process. After all, consumers are never more engaged with your brand than when they choose to contact you, and training your customer staff to exceed expectations can gradually build rapport, loyalty and a reputation for excellence.
While there are many lessons to learn as a young or inexperienced entrepreneur, the relationship between cost and profit is undoubtedly the most important. If you can learn to reduce your firm’s cost base without impacting on quality or productivity, you can drive higher levels of profit through sustainable means.