There’s a misconception by many Business owners, that all they need is more new clients, and things will be great. It’s actually not that simple. It’s problematic to confuse top line business income, with bottom line net profit, or owner income. They are very different. This is evidenced by the large percentage of owners who might see their business revenue increase, but their own income doesn’t change, or in some cases is falling.
I’ve outlined what I think are the five things to look for, if your income isn’t increasing, despite your business growing.
1. Prices are too low
Three factors here:
Most business owners undervalue what their business provides to customers.
There are a lot of business costs which never get factored in to setting prices, and
Price increases don’t keep up with business inflation, which over the last 2.5 years has been around 27% in Australia.
2. Expenses have crept up without you noticing
One of the biggest reasons why bottom-line profit remains stagnant, despite top-line Business revenue increasing, is expense creep. Which results in margin squeeze. At least every 12 months, go through your P&L with a fine-tooth comb to look for what you can either remove, because you no longer need it, or identify expenses you could get a better deal on.
The beauty of this exercise is that 100% of every $1 expense you save, goes into your pocket. The whole lot!
3. Some of your Employees are no longer right for your business
This effects productivity, morale, and subsequently reduces your gross and net profit. So whilst your business is doing as much, or sometimes more work, your profit margins are lower. Truth is, Business growth is based largely on who you hire, and who you don’t fire.
4. Not maximising your existing customers
Your existing database of customers is a lot more lucrative than you think. They trust you, and are a lot more likely to buy from you again, than new clients who have never purchased from you before. Finding and bringing on new customers is expensive. When you consider the cost of advertising and marketing to get a new client, the first transaction is by far the least profitable. Repeat customers are the most profitable for a business, because you’ve already spent all the time and money to bring them in, and they already trust your business.
So whilst you may see your top line revenue increasing, and your Business growing, your bottom-line net profit is not, because your business is made up largely of first time, low-profit clients.
5. You have too many of the wrong types of customers
Many businesses fall into the trap of taking in all types of customers, without ever really considering which sectors are most profitable for the business. After all, it’s all revenue. However, every business is different, including yours. There will be certain sectors that your business is set up to work with, i.e. they make your business the most amount of profit, and some that actually cost you money. You may find that over the years, for whatever reason you’ve taken on the wrong type of customer for your unique business. And the number of these types of clients has grown organically.
The net effect is that your business is making more top line income than ever before, but the bottom line is not as good as it used to be.
Solution is to identify your most profitable sector or customer group, and acquire more of these. Conversely, identify which clients are actually costing you money, and cut them off. You can do this by increasing their prices to the point that they will find an alternative business. And that business may actually make money from the customer. But yours won’t. So better to cut them off today.
FACT: Business income is not profit. Most businesses have what we call bad income clients. Identifying and getting rid of these, will help you make more money as a business owner.
If you find yourself scratching your head about why the business revenue is increasing, whilst your own income is not, take a look at these five points. And when you do decide to take action, it’s always best to take a one at a time approach. Attacking more than one initiative at a time will dilute your attention. Take a focused approach and ensure your success.
