The Million Dollar Failed Company: How to Avoid Going Broke In BusinessEditorial Team
Contributed by Octavia Conner, a financial consultant specializing in outsourced CFO and tax services.
It’s a common belief among small business owners that achieving $1 million in revenue indicates success. However, many owners struggle to make their businesses profitable even when they reach high revenue figures.
A $1 million consulting company with ten employees might have a payroll of $600,000, leaving $400,000 for operating expenses and owner’s compensation. However, with health insurance, office space, marketing expenses, technology, and debt payments, an owner might easily be making less than their employees.
Profitability is still held as a “nice to have” in business, but it doesn’t have to be. By leading with your financial goals first, you can create a company that not only grows in revenue but achieves real value for you as the owner without needing to sacrifice service quality.
Why do companies with high revenue still fall short of profitability?
Just because you make money doesn’t mean you can keep it! A company’s cash flow might be low because they’re spending a lot, which means they might borrow money or take in investments.
Business Insider lists the average McDonald’s franchise startup costs between $958,000 and $2.2 million with annual revenue around $1.8 Million, while owner’s pay can hover at $150,000. That’s less than 1% of the company’s revenue. That means it takes between 7-15 years to earn back an investment in that franchise due to high expense ratios.
As companies grow, they often invest heavily in sales and marketing efforts. While these are essential areas to pay attention to, the financial foundation is often missing when these are the top priority.
A financial foundation is a basic understanding of information such as:
- How much it generally costs to make each dollar of revenue.
- The approximate financial value of a customer and typical longevity.
- The quarterly, monthly, or weekly revenue goals to maintain stability.
A good financial manager can help the sales and marketing teams make better decisions by asking the right questions. In addition, strong marketing stewardship is strengthened by excellent financial awareness.
Many owners can’t afford a salary
A few years ago, the book “Profit First” by Mike Michalowicz became a cult classic. Inside, the author discussed the common fact that owners are not always getting paid much money, if at all.
According to Payscale, small business owners in the US make an average salary of $70,300. But many company founders take no compensation at all as the company stabilizes. What’s interesting is that the money is often there; it’s just being managed incorrectly.
U.S Bank’s study found that an overwhelming 82% of failed businesses cited cash flow as a contributing factor to their failure. This challenge is why many don’t see how they can navigate creating a salary for themselves.
The key to solving this, according to Michalowicz, is starting with your financial goals instead of your expenses, which is a massive mindset shift.
Why sales and marketing can’t fix the problem
When companies fall on hard times, we often see them start making cuts in what they consider to be cost-centers. These start with administrative roles that manage day-to-day operations and move upwards into marketing and sales operations to condense activities. While many feel this is incorrect because it reduces efforts towards revenue generation, what often stands out for financial pros is that companies don’t see a significant loss of profit. This is because there are many ways to KEEP more money besides simply MAKING more of it.
Finance is not only the backbone of an enterprise, but it’s also the engine behind a company’s ability to thrive, grow, and expand.
Author – Octavia Conner, Founder and Virtual CFO at Say Yes to Profits
Octavia Conner is a financial consultant specializing in outsourced CFO and tax services. With a focus on profitability, her firm Say Yes to Profits has built a track record of helping over 90% of its clients grow between 30% and 850% within a year and reducing their tax liabilities by 60% or more. Octavia has over a decade of experience in accounting and finance and was selected as a top 50 accountant in North America.