A profit and loss statement is crucial for managing a business's finances. It helps companies...
Regardless of the size of your business, generating revenue is no longer a guarantee of success.
For more than a decade, we have provided fractional CFO, finance, and accounting services to hundreds of small businesses. We can confirm, without a doubt the challenge lies not in making money but in keeping it.
The harsh reality is that many businesses find themselves on the brink of insolvency despite impressive top-line figures.
This paradox begs the question: How can a company generate good revenue yet fail to sustain profitability?
This article explores the hidden pitfalls that erode profitability and offers practical strategies to overcome them.
Understanding Small Business Revenue Streams
The first step towards maximizing your business profitability is understanding and managing revenue effectively.
It’s not just about how much you make but how well you manage what you make.
As Peter Drucker, the legendary management consultant, famously said, “What gets measured gets managed.”
Understanding your revenue streams and their respective management processes is crucial.
For example, let's look at a marketing agency that generates revenue through project-based work.
As experts in Finance & Accounting Solutions Specifically For Marketing Companies, we can guarantee you the following is true:
Revenue might be flowing in from multiple clients, projects, and services, but without a clear understanding and management of these streams, financial instability is inevitable.
Particularly in marketing, where the control of scope and minimizing scope creep is critical to your small business profitability.
As the CEO, you must ask critical questions about your revenue streams:
- What’s generating the actual revenue?
- How are we managing these revenue streams?
- Are these revenue streams profitable, if not, why not and how do we correct them?
- What decisions are we making based on the project financial tracking, and when?
- How do we ensure that our deals continue to generate profits, not just revenue?
- Do I have a simple dashboard tool that allows me to maximize profit while providing the best services for my clients?
Building and Engaging a Profitable and Happy Team
A crucial aspect of sustaining profitability is ensuring that your team remains engaged and in tune with both your customer needs and the project metrics that ensure profitability.
If they lack understanding with either area, then your management gets exponentially more difficult.
Your entire team must define, and then adhere to project timelines and expectations.
Most marketing agencies focus on the project deliverables for the clients, but rarely consider the expectations for the business.
In other words, you can deliver outstanding results for your clients, but if you can't do that profitably you will not be in business long.
As the CEO, you must ask critical questions about your teams and management processes:
- For each project, do you have a defined objective within a given time period?
- Is each objective broken into the steps that lead to success with deadlines?
- Can each project be broken into the required resources needed to reach the objective?
- Do you have the management tools to then allocate those resources across different projects without jeopardizing deadlines and expectations?
- Are your marketing projects profitable, if not, why not and how do we correct them?
- Do I have a simple dashboard tool that allows me to maximize profit while providing the best services for my clients?
The role of leadership here cannot be overstated.
As Steve Jobs famously said, “Great things in business are never done by one person; they’re done by a team of people.”
Providing your team with the insights and tools they need to stay connected with clients is vital for continuity and repeat business.
But even more important, providing your team the benchmarks and tools to stay profitable is critical for your long-term success and their employment.
Optimizing Service Delivery Costs
One of the most significant decisions impacting profitability is how to manage service delivery labor.
CEOs must distinguish between captive costs, such as full-time employees (W2), and variable costs, like contractors (1099).
Each has its advantages and disadvantages, and the choice between them can significantly impact your bottom line.
Full-time employees offer stability and consistency but come with ongoing costs, including benefits, training, and other overheads. We call this 'feeding the beast'.
In contrast, contractors provide flexibility and are cost-contained to specific projects. This flexibility can be a financial boon, especially in managing project-based work where demand fluctuates.
Feed the Beast: 1099 vs. W2
The decision between hiring full-time employees and contractors is a balancing act.
Contractors (1099) may command higher rates, but they offer flexibility and cost-effectiveness per project.
Once a project is completed, the financial obligation ceases. This containment of costs can be advantageous, particularly in volatile business cycles.
On the flip side, full-time employees (W2) can be less expensive in the long run and offer better control over quality and training.
However, they represent a captive cost that continues after the project completion.
As one of our best CFOs put it, “You have to feed the beast every month,” referring to the ongoing financial commitment of maintaining a full-time workforce.
Strategic Financial Management
Effective financial management goes beyond just tracking income and expenses. It involves understanding the financial implications of every decision.
As Harvard Business Review highlights, "Aligning financial strategies with corporate objectives ensures sustained growth and profitability..."
Your key to long-term profitability is to develop systems that accurately attribute costs across projects, including training and ongoing expenses.
Without this granular understanding, you risk losing money steadily despite high revenue.
A fundamental principle in avoiding profitability pitfalls is strategic financial management.
This involves not only tracking revenues and costs but also understanding the implications of each hiring decision.
As the CEO, you must ask critical questions about your financial management:
- Do you have a financial roadmap that allows for your vision to become a reality, profitably?
- Do you know that you are optimizing your human resources across projects?
- Do you confidently know that you are not wasting precious resources by just hiring wrong?
- Are you confident you can 'feed the beast' every month without undue stress?
- Do you have a simple dashboard tool that allows you to maximize profit while providing the best services for my clients?
Conclusion: Leveraging Fractional CFO Services
This is where the expertise of a fractional CFO can be invaluable.
Fractional CFO services gives you the answers to every one of those questions above.
Your CFO is your leverage to gain the financial acumen needed to make informed decisions, optimize costs, and maintain profitability.
By providing insights into cost management and financial planning, a fractional CFO can help CEOs strike the right balance between hiring strategies and project management, ensuring that quality and profitability are not mutually exclusive.
As the Economist notes, “Flexibility is key to organisational success”.
By leveraging the strengths of both full-time employees and contractors, and with the support of fractional CFO services, businesses can thrive even in challenging business cycles.
For CEOs determined to steer their companies towards sustainable profitability, understanding the intricate balance between revenue generation and cost management is the key differentiator.
If you’re ready to take your business to the next level and ensure long-term profitability, consider how our fractional CFO services can provide the strategic financial guidance you need.
Let’s work together to build a business that not only survives but thrives.
