In business I can’t emphasize strongly enough the importance of making acceptable profits and growth and that one of the principle objectives of being in business must be to achieve long term sustainable profit growth. The majority of SME businesses either don't make enough profit or find it difficult to grow, yet from my experience and research there are common factors that if implemented in a business, will achieve long term sustainable profit growth. These factors I have called the “secrets to profitable growth” and the following is a brief summary;
- Secret number 1 - Leadership “ It all starts from the top”
Without effective leadership from the owners and leaders, businesses will struggle. Leadership in the SME world is incredibly complex as owners and leaders need to have knowledge in such a broad range of fields yet most have had little or no training other than in the technical elements of what they do.
SME owners and leaders need to be entrepreneurial. They need to be able to identify business opportunities and have a clear business purpose and vision of what they are trying to build. They need to be able to manage themselves and most importantly they need to manage others. They need to have strong character and values that work together to build a strong culture. And the one defining point I believe is owners and leaders need to achieve results and not make excuses, as you will be remembered for what you achieve in business not how busy you are.
- Secret number 2 - Positive cash flow “Profit isn’t profit until it winds up in the bank”
For a business to succeed it must have a positive cash flow which means not only making a profit but ensuring it winds up in the bank. Your business model must identify how you intend to make a profit and must also identify how your revenue will produce a positive cash flow by either receiving deposits, making progress claims or having tight trading terms. A business must have an accurate and timely P &L and Balance sheet to provide reporting necessary to monitor cash flow and have a complete financial management system including procedures.
- Secret number 3 - Continual Change “There are two types of businesses, those that change and those that disappear”
Profit cannot be improved without change, and making change without structure will have less than a 30 % success rate. To make change in business there are three major factors.
- Your readiness 30% - how ready the organization is to implement change.
- The capability 40% - the skills, people, training and resources to implement the change.
- The beliefs 30% - overall attitude and culture of the organization in relation to the change.
- Secret number 4 - Having a business model that works “How you plan to make a profit”
Many businesses that start up struggle to make a profit and the government statistics highlight the fact that 80% of new businesses fail within the first five years. The question is why? We believe it is because owners don’t have a clearly defined business model which defines how you plan to make a profit. More detail on this is provided later however if you aren’t making a profit or enough profit start with a detailed review of your business model.
- Secret number 5 - Structure “ Your most valuable asset not on the balance sheet are your people”
A business is a collection of systems written and implemented by people. It is critical a company has an effective structure which means employing the right people with the right attitudes, in the right positions, and having the right procedures to follow. Your people then need to be well managed to get the best from them, and this is where leadership and a well-developed HR system and procedure must work together.
- Secret number 6 - Systemization “Working on the business not in it”
Business is often characterised by inconsistent profitability (the symptom), and the cause in most cases is a lack of documented systems and procedures for critical business functions such as, how will you win work, how you do the work, how you manage the money and how you manage the people. A business is a collection of systems written and implemented by people, if you want to improve the business you have to work on the systems, processes and procedures and this is what we call “working on the business and not in it”.
- Secret number 7 - Develop a Plan “ A business with no plan is a plan to fail”
A business must have a clear plan that includes where the business is at right now, where it wants to go in the future, what the strategies are to get there and an action plan of what is to be done by whom and when. A well developed and implemented business plan primary function is to bring your Business model to life and to provide a pathway for others to follow.
- Secret number 8 - Measure your performance “ If you can't measure you can't improve”
A business must be able to measure their critical business drivers, both financial and non-financial. Leaders must identify what they need to know to manage the business to make the right decisions at the right time. The system that provides this information is the management information system. The typical things management needs to know is cash flow, overall profitability, division profitability, job profitability, customer profitability, work on hand, pipeline size, sales conversion rates and labour productivity to name a few. You need to measure, report regularly, analyze and take corrective action.
- Secret number 9 - Accountability “Without accountability there will be little chance of change ”
Only 30% of change initiatives in business will ever be implemented, if you want to ensure success ensure you have accountability. Who holds you and your people accountable for performance, strategies and actions? Accountability can be done by having a board, either formal or advisory, or for smaller businesses a mentor or coach. The problem with most small business is that owners generally have no accountability and owners just do what they like to do or want to do, which in many cases is not in the best overall interest of the business.
- Secret number 10 - Maximise Profitability “ It is not how big your top line is that matters, it is how profitable you are”
You can’t keep putting more work through an incompetent system. Are you in the upper quartile of profitability for your industry sector? If not, you have to identify and remove profit leakages and remove business waste. You should not aggressively chase sales until you have removed your inefficiencies and are as profitable as you can be for your current sales level.
- Secret number 11 - Marketing “ How to achieve profitable revenue growth”
The function of marketing is profitable revenue growth. A business must develop its own unique tapestry of strategies that when implemented will provide long term sustainable profitable growth. Strategies will be a combination of capacity and capability, sales, positioning, pricing and communication. These strategies are then applied to retaining and obtaining more work from existing customers, finding new customers and building your brand.
- Secret number 12 - Sustainable competitive advantage “why will your customers buy from you and not your competitors”
If there is no differentiation between company’s consumers buy on price. For long term profitability you need to be differentiated, you need to be able to demonstrate a sustainable competitive advantage. In today's world of business successful companies are going to a new level and developing blue ocean strategies which are a combination of increased benefits and reducing prices and when they work together, are so powerful that competitors become irrelevant.
The above factors are proven and tested however no company gets its all right. Most companies believe they are in better shape than they really are, and miss the opportunity to significantly improve the profitability of their business.
For an owner or leader to evaluate where their business is at, I have developed a “business health check” which has been designed as a self-evaluation tool to identify where your three greatest opportunities are for improvement in your business.
If you would like to receive a free copy of my business health check or would like a complimentary one hour opportunity assessment session please contact me at;
Simply Business Australia
Philip Coombs “The Profit Coach”
0419 834 678