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.
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:
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:
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.
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.
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.
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:
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.