How Much Money Your Business Loses?
One of the most significant concerns of every business owner is the profitability of their project. Be it a video gaming website or an online shop; you anyways have to invest in it, hoping that your money injections will be rewarded later.
Still, many small businesses neglect the actual calculations of whether their efforts are being repaid. Therefore, instead of being a source of income, a project turns into a black hole that continually demands more and more resources, both monetary and timing.
And even if your business generates profit rather than eats it, you still might be losing money. Today we will puzzle out the method often used by private equities to find out whether a business works on its full potential. It is simple enough to be calculated even by small online companies and provides valuable data that can be used in upgrading your further business development strategy.
How to discover the true efficiency of your business
In order to conduct the calculations, you first need to analyze the current state of affairs in your business, starting with the amount of money your business generates annually on an average. This step is easy – you simply watch the analytics for your past year and sum the income for each month of the year. If you use PayOp, then this can be easily done in your merchant account, where all the incoming and outgoing transactions are conveniently collected and listed.
You then have to recollect all the investments you’ve put into your project. It should include:
- the money you’ve paid for advertising services (Google Ads, Instagram promotions, influencers integrations)
- the cost of all hardware upgrades you’ve done, like software purchase or cloud services
- the cost of the raw materials used for products making (if any)
- your employees’ salaries
- the development and support cost of your website, applications, other products
Make sure you’ve included all the smallest expenses, as they would influence the final result of the calculations. Let’s say that the size of your yearly investment in your business is around $5 million.
Subtract the number you’ve obtained from the amount of the income your business generates. If the number you’ve received is negative, then this is a red flag that warns you about the unprofitability of your business. It might be a common phase of big-investment business establishment, where the company is expected to generate profit after two and more years of work. Yet, for small businesses, such an annual income might be disastrous.
Let’s say that, after the subtraction, you’ve received some positive-sum – like, for the sake of simplicity, $500,000. It is a great result, but what if that’s not your business’s maximum efficiency?
To find out how much income your business should create in perfect conditions, you have to determine its risk category, from which the rate of return should be calculated. For example, being a moderately risky business, your risk-adjusted rate of return should be around 15%.
The income your business has to generate could be found out by taking 15% of the sum of your investments, which would be $750,000. Comparing the obtained number with the actual profit from your business shows you how much money you’ve lost through the last year, which is $250,000 in case of our example.
Using this simple formula, you can see whether your business works on its full potential, or whether you destroy it with some mistakes in managing.
What decisions drown your business
Trying to compete with more popular companies and brands, small business owners often decide to dump their prices instead of finding some particularity that would distinguish their product from similar ones. Such a strategy attracts the customers who would gladly choose another product if it would be cheaper than yours. This also means low income, lack of money that could be directed into the business development, and, eventually, death of your project.
Do not try to attract people with low prices. Even a seemingly small margin increase might mean a lot in the long run. And to find out the optimal price for your products or services, monitor your competitors closely – their example might give you the right direction of movement.
Absence of marketing strategy
Many businesses neglect to study their audience. Keeping in mind that around $673 billion was spent on advertising in 2019, you can only imagine how much money went up in smoke due to an incorrect audience targeting.
The efficiency of your whole marketing strategy depends on how well you’ve studied your customers and their behavioral patterns. If you sell video games, you can’t expect older people or children to be interested in your product – it usually would be young men in their late twenties. Knowing who is your regular customer helps a lot in finding the promotion platforms where your advertisements would work on their maximum efficiency. Therefore, the money you’d spend would generate as many conversions as it possibly could.
Getting scattered instead of focusing on one goal
The idea of providing your customers with more and more new services and features seems attractive to many business owners. A little they know that the experienced businessmen call this approach one of the biggest mistakes a young business can make.
Splitting your attention, energy, resources into a few directions means that all the products you’d work upon would be of the mediocre quality. Instead, make sure that your main product/service satisfies even the highest customers’ demands – only after that, your business could shift its attention to other projects painlessly.
Making all the important decisions on your own
You’re the head of your company, and you think that no one knows better the needs and abilities of your business rather than you do.
This mind-set, that had failed many and many business owners, and drowned thousands of companies before they even had a chance to enter the market.
Newsflash – some people are more experienced in business leading than you. Being a good leader means finding those people, hiring them, and trusting them to at least advise you on what to do next with your project. The overconfidence in your expertise, inability to delegate responsibilities to employees and refusal from listening to people around you might be the reasons why your business stopped in progress rather than conquering new markets.