Even with stable sales, a strong team and high demand, business can slip. Profits remain flat or decline for no obvious reason. At first glance, everything is under control, but money is flowing away, and the potential is not realized. The true reasons lie not in the economy and not in seasonal fluctuations. Their source is in management decisions that are effective in the short term, but in the long-term “game” they lead to negative consequences. And the longer the business works in this paradigm, the more difficult it becomes to manage and make a profit, because all the time you have to “extinguish fires” or get out of crises and survive.
Lack of financial business model
Many owners have been working for years without a clear understanding of how exactly the company earns. Calculations of the unit economy are postponed until later, the financial model exists in the head or on a napkin, and the real profitability of the product remains in the shadows.
Without a profit forecast, without calculating a break-even point, the business works blindly. Decisions are made on intuition, instead of relying on numbers. The result is unpredictability, inflated expectations and chronic underfunding of growth.
Business, as a result, does not forgive this, because business loves mathematics.
It seems that business is growing, there are customers, turnover is increasing. But margins are declining, costs are rising, and instead of profits, you get just an illusion of success. In business, it is not revenue that matters, but profit.
To avoid mistakes in the financial model, you need to understand clearly your unit economy, namely: which products or services bring profit, and which bring losses. It is important not just to count revenue, but also to analyze margins, to know your break-even point.
To do this, it is worth introducing a forecasting system that will take into account both current and future changes in income and expenses, a budget that can “afford” each direction in the business. Profit forecasts and breakeven point calculations will help you make better decisions and identify business weaknesses before they lead to losses.
Owner = principal executive
In many companies, the owner is in fact the only irreplaceable employee. He closes sales, he is responsible for strategy, he resolves personally issues with contractors, customers and accounting. Everything rests on him.
This approach burns time and energy. There are no resources left for development: neither internal nor external. Scaling becomes impossible – the company just physically cannot grow beyond the capacity of one person.
The owner cannot think about the strategy while he is working “in the field.” Delegation is postponed because “no one will do better,” and in the end there is a vicious circle when the company depends on the overloaded and burned-out owner.
Well-structured business processes and correctly hired employees will allow the owner to exit micromanagement, and in the future to delegate operational activities. Freeing the owner from a number of tasks will allow him to devote more time to the strategy and development of the company.
Opacity in management and finance
When business money and personal expenses of the owner are intertwined, it becomes impossible to assess objectively the real financial picture. Expenses are hidden behind personal spending, and profits are in question.
Lack of system accounting or doing business “somehow” is another common mistake. Without accurate data, it is difficult to make informed decisions, and incomplete reports or financial measurements create the illusion of order, where in fact there is chaos.
As a result, costs begin to rise, and the owner does not notice this. Hidden costs, unoptimized processes and missed opportunities negate the full potential of the business. Instead of growth you get constant “cash gaps” that are not visible until it is too late.
To avoid the problem of opacity, it is important to separate personal and business expenses, as well as introduce an accounting system that will allow to track each item of expenses and income. It is necessary to conduct financial audits regularly and analyze data in order to identify hidden expenses and optimize processes. A systematic accounting approach and regular reports will help avoid chaos, make expenses controllable and assess accurately the real financial picture, enabling you to make informed decisions and direct resources to business growth.
Pricing errors
Fear of raising prices is one of the most common mistakes that limit profits. Owners are afraid of losing customers and do not take into account that the cost of their product or service has not reflected real value for a long time. Prices are “frozen” at the old level, despite changes in the market.
With increasing costs, the product is not revised, and the margin is reduced. Given growing costs, the value of the proposal is not updated, and the owners continue to work on an outdated model, forgetting about the need to adapt.
There is no clear understanding of what is important for the client and what he is ready to spend money on. Instead of identifying key value and increasing value accordingly, the business is stuck on prices that do not correspond to the quality and uniqueness of the product.
To avoid errors in pricing, owners need to review prices regularly, taking into account not only the increase in costs, but also the real value of the product for the client. It is important to understand that prices should match the quality and uniqueness of the offer, and not remain frozen at the old level. Regular analysis of the market, competitors and customer needs will help determine which aspects of the product are most valuable to the target audience, which will allow to adapt pricing policies correctly and increase business profitability.
Lack of development strategy
Many companies work by inertia – “as they are used to,” without thinking that the market has changed, as well as the capabilities and needs of customers. This leads to stagnation, when business gets stuck in old schemes and does not adapt to new realities.
The lack of a clear focus also limits growth. The owners are trying to keep up with everything at once: investing here, developing there, and spending energy on one more direction. As a result, the company loses its identity, and resources are sprayed without tangible results.
In addition, the lack of regular market and competitor analysis leaves the business vulnerable. Without an accurate picture of the external environment, it is difficult to predict trends and respond to changes in time. The market is developing, and the company continues to move at random.
To overcome the lack of a development strategy, it is important to focus on a clear focus, namely, to identify the key areas and resources that will bring the greatest return. Owners need to avoid spraying efforts and assess risks in advance when expanding their business. Regular analysis of the market and competitors will help to understand external trends better and to adapt the strategy to new realities, which will allow the company not just to survive, but also to develop using current opportunities.
Weak team without KPI
When employees do not understand what exactly they are responsible for, then the result of their work often remains at the level of “we seem to be doing something.” Without clear KPIs and benchmarks, everyone works differently, and instead of synergy, chaos is obtained that slows down the company’s growth.
The lack of a profit-linked motivation system makes employee efforts meaningless. If there is no clear understanding of how their work affects the result, then the team will not be interested in the growth of the company either. As a result, the employee remains “in the comfort zone,” and the company is declining.
Mistakes in hiring also play a role. When a business needs urgently to close a vacancy, then in search of employees they are ready to take “anyone.” This leads to a decrease in the quality of work, problems with involvement and performance, because not every person is suitable for one or another role in the company.
To solve the problem of a weak team, you need to implement a clear KPI system, where each employee understands his goals and their relationship with the overall results of the business. To do this, it is important to set specific, measurable and achievable indicators, such as sales volume, the number of processed applications or conversion from advertising campaigns. Motivation should be tied to these metrics so that employees see how their efforts are impacting company growth. It is also necessary to pay attention to quality hiring to avoid mistakes that can slow down development, and attract people who can bring real value to the team.
Refusal of external expertise
Self-syndrome is another common mistake that hinders business growth. Owners are confident that they know best what needs to be done and do not trust external specialists. This leads sometimes to dead ends and reduced efficiency.
The lack of habit of testing hypotheses and analyzing bottlenecks puts businesses in a vulnerable position. When the owner solves all the issues himself, he risks not noticing exactly where his company is skidding. The lack of an objective external view slows down progress and delays problem solving.
Consulting, training and mentoring opportunities are not considered, although it is external expertise that can help identify weaknesses and offer optimal solutions. Instead of taking advantage of the knowledge of experienced specialists, the business remains in a vicious circle, where every step is taken at random.
Therefore, we must stop being afraid to attract external expertise. Consultants, mentors and specialists can give a new perspective on problems that have long gone unnoticed and offer solutions that seem obvious to an external observer only. Refusal of external assistance for fear of losing control only slows down development and leads to dead ends. Try, do not skimp on the knowledge of others – this is an investment in long-term growth. External expertise helps not just to identify weaknesses, but also to optimize processes, improve strategies and avoid mistakes that cost time and money.
Conclusion
Business profit is not an accident, but the result of informed management decisions. Often, problems with profit growth are not related to external circumstances, but to how key decisions are made within the company. By fixing at least 2-3 of the described errors, the business will begin to show improvements in the near future.
It is important to understand that success does not come on its own. In order for a company to become profitable and efficient, you need to work systematically on its internal processes. We encourage owners to audit their business processes and possibly seek external expertise to get a fresh look at the challenges and opportunities for growth.
By Julia Chentsova, lawyer, entrepreneur, founder of JTLconsulting