For many entrepreneurs, it’s not all about the money. Most of them are driven by ideas that they believe in enough to give up job security and hours of sleep. Securing a financial reward is usually one of the goals as well, but far from the most important one.
Despite these priorities, it’s very common for entrepreneurs to feel that their businesses don’t make enough money. When every day is a struggle to make sales and you’re barely getting by, money becomes a much bigger concern than it should. Here are three reasons why small businesses have trouble making money and what you can do to fix them.
- Wrong Target Audience
If you know you have a great product but aren’t making many sales, you could be attracting the wrong people to your business. To solve this, you need to determine your ideal customer.
One way to do this is to look at the people who are praising your business on social media and sending you emails thanking you for your products. Conduct short interviews with them to find out more about their age, job, latest purchases, favorite brands, and so on. Figure out why these people chose your business and what makes them happy with the product.
Once you know who your target audience is, market your products specifically to them. For instance, if your ideal customer is a manager at a tech company, switch your social media efforts to LinkedIn. If you’re running Facebook ads, use the Ads Manager to target your customers.
- Poor Pricing Strategy
Many small business owners base their prices on what they think is “fair” or on what others are doing. This can be a part of creating a solid pricing strategy, but you also need to consider what makes your business profitable. Here’s a formula that will help you do that:
(Business expenses + Wanted salary) / (1 – Tax liability percentage) = Annual gross revenue
Business expenses include things like employee payroll, contractor payments, and so on. The wanted salary part refers to the salary you’re taking out of your business to pay yourself. Keep in mind that many entrepreneurs don’t pay themselves a salary for the first few years of their business.
The tax liability percentage represents the percentage of your revenue that will go toward taxes. For the formula to work, you need to express this percentage as a decimal. For example, if you’re paying 35% of your income for taxes, your tax liability percentage would be 0.35. Once you do the maths, you’ll know how much you need to make to break even.
- Lack of Tracking
If you’re not sure what your business cash flow is, you won’t have a solid grip on your finances. It’s the positive cash flow that keeps your business running day-to-day.
It’s possible to have a negative cash flow and positive income and vice versa. Let’s say you own a design agency and you’ve landed a $15,000 contract to design a website. Even with an upfront fee, there’s a good chance your cash flow will be negative this month despite your overall income ending up positive.
For best results, you should always be aware of both your income and cash flow. The easiest way to make this happen is to have your accountant a Profit & Loss statement. Every week, set aside some time to go over this statement to get a better picture of your finances.