Running a business is hard work. Making it profitable is even more challenging.
Doing both in times of uncertainty and inflation seems impossible on some days.
And it leaves many business owners worried.
Times of uncertainty
According to a recent CNBC|SurveyMonkey Small Business survey, over half (51%) of small business owners describe the current state of the economy as “poor.”
In these times of uncertainty and rising costs due to inflation, it’s important to manage your finances even more carefully. You need more clarity about the financial situation of your business and how you should forecast for the months ahead.
Asking the right questions
Are you really aware of what’s going on in your business?
Do you have enough cash on hand in case your business is not profitable to survive?
Do you have the right key performance indicators (KPI’s) in place to track your business’s current development and accurately forecast the months ahead?
Those are the questions every business owner needs to ask themselves right now.
Choosing the right KPI’s
And here is where having the right KPI’s in place can make all the difference.
Based on my own experience and my work with my clients over the recent years, here are three important KPI’s to track monthly to ensure you run a profitable service business:
- Annual Recurring Revenue per Client: Divide your annual revenue by the number of your clients. This KPI can give you valuable insights into your pricing decisions and help to understand why some clients may attract higher price points than others in your current business. It could also make you aware that some pricing agreements with an existing client need to be renegotiated. If you can also access external industry benchmarks, you will obtain valuable proxies to measure ARR per client against to see how your business stands in the overall marketplace.
- Annual Recurring Revenue per Employee: Divide your annual revenue by the total number of your employees. In a service business, employee-related costs are typically the highest. This KPI will show you quickly if (and by how much) your revenue covers your most significant expense (your employees).
- Profit Margin %: This may be an obvious one. Take the percentage of revenue that remains after paying for the direct (and indirect) costs – including salaries – of delivering a service. This number will be your north star to understand your business’s profitability.
Three tips for running a profitable business
- Keep your books accurate and up to date: Your profitability is only as good as the accuracy and timeliness of your accounting and reporting results. Adopting integrated invoicing and payable processes provide real-time insight, enabling businesses to course correct and hit profitability targets.
- Have a forecast process in place: Regularly reviewing, analyzing and updating assumptions is critical to understand future profitability, especially in times of uncertainty. Consider a short-term (current year) and longer-term forecast horizon, as well as multiple scenarios.
- Right size your expenses: In times of economic uncertainty, adapting your costs will be one of the first things you have to do. What part of your costs are fixed (like salaries, rent, etc.), and what costs can be reduced quickly? A clear picture of your expenses and spending will make it easier to understand what you have to change if you want your business to become more profitable.
Having the right resources
With the uncertainty of a recession looming and rising inflation increasing your costs, it’s understandable that many business owners are concerned about what lies ahead.
Managing your finances and understanding the profitability drivers underlying your business will be on top of your agenda as you navigate through these turbulent times.
But you don’t have to do it alone. An outsourced bookkeeping services provider can give you the financial insights and analysis you need to keep your business growing and make it more profitable than ever.