At the best of times it is difficult for SMEs to grow and stay profitable. Since the end of March most have been focused more on surviving. During the last few months attention has been diverted to managing employee furlough, applying for bounce-back loans, managing cash flow in difficult circumstances as well as dealing with the operating issues and supply chain problems the Covid-19 has given us.
But as we come out of the survival phase of the pandemic, entrepreneurs need to step back from their businesses and consider whether the old model is going to work in the new marketplace. Most successful small businesses are focused on a niche where they can provide a quality service to a certain type of client. But even if that was successful six months ago it’s worth reassessing the situation now.
Research carried out by Jonathan Burns at the Massachusetts Institute of Technology found that in most companies only about one quarter of transactions make a significant profit. In his book “Islands of Profit in a Sea of Red Ink”he goes on to state that 40% of transactions actually make a loss. That’s been true for decades. Most of the businesses that I know have found that their cost structure has now increased and they are having to work harder whilst their clients are unwilling to pay any more for what they see as the same services.
Regularly reviewing your business model has always been a good idea, but right now it’s essential. Two key elements to review are core services and your ideal client profile.
As SMEs grow they are often tempted to expand the services they deliver in order to increase revenue. This might seem like a good idea, but if it means straying away from the areas of expertise it can cause problems. Successful restaurants are often the ones with a small menu of dishes that are well designed, profitable and well delivered. Those who try to deliver every type of food under the sun will have problems with consistency and waste. What are your core services, and can you still deliver them profitably post-Covid-19? Do you need to adapt and provide a different service going forward?
Ideal client profile
Who are your ideal clients? Think about your current clients. Which ones would you love to replicate and which ones would you ideally not want to do business with? How do the clients you enjoy working with differ from those that you would like to lose? Use the list of characteristics below and any others that are specific to your business to produce an ideal client profile:
· Annual revenue
· Number of employees
· Age (start up, growing, established)
· Budget for your services
It is better to have a smaller, more efficient and profitable business rather than risk being a busy fool. A great example of this is Volvo. They are one of the most profitable car manufacturers in the world and yet they have a relatively small product range and focus on safety conscious customers.
So what changes can you make to ensure your business not only survives but thrives?
Andy Cristin is a consultant finance director at Pareto FD Ltd who has a knack for turning start-ups into profitable businesses, having grown four companies from zero to multi-million businesses.