Many businesses fail for a number reasons like ineffective management, insufficient funding, indescribable competition, and astronomic costs. I have personally seen this happen to many businesses.

Why do some succeed and others fail? It is easy to explain. Regardless of size and industry sector, most healthy companies share the following three characteristics when it comes to their financials:

Sufficient revenue

You and I have heard it before, but this cliché is true: Cash is king. Without sufficient revenue coming in, profitability will be precarious at best. To determine how much revenue your business needs to be profitable, perform a profitability breakeven analysis. Then review your sales and determine where you can make changes. For example, you may need to invest more in Research & Development or focus more on prospective clients or customers.

I was in a conversation with a business owner and he said that he was always having to use his credit line to make his payroll. I asked how often he billed his clients? He proceeded to tell me that he was billing when he found the time but at least monthly. How many days does it take them to pay you? The average was 45-60 days. Since you bill at the end of the month and then wait 45 to 60 days, that means you are paid for a product or service that you provided at the 1st of the month until 75 to 90 days after.

Why would this cause an issue with his Payroll? Does this sound like you?

Well-managed labor and production costs

For most companies, labor is their biggest production cost especially when you factor benefits and taxes into the equation. Determine whether your labor force increases the value of products or services enough to offset the cost. If not, consider the following solutions:

  • Provide effective training or better incentives,
  • Improving production processes
  • Invest in more modern facilities and automation
  • Outsource labor costs (temporary employees, virtual staff, etc.).

When production overhead costs are relatively high compared to the product or service’s selling price, it is time to act. You might increase the price of the product or service, find better production methods, or even discontinue the product or service.

Let’s address each of the solutions:

Outsource labor costs (temporary employees, virtual staff, etc.)
What duties could someone else handle that you are now doing?
Could there be someone who can perform a duty more effectively?

Invest in more modern facilities and automation
Is your working environment conducive to productivity?
What processes can be automated or redesigned?

Improving production processes
Are you producing your product how you have always done it?
Is the process repeatable or is it in someone’s head?

Provide effective training or better incentives
Is your current training effective and how do you know if it is?
What employee incentives do you provide and are they valued?

Lean operations

Operating expenses, costs that you incur to run your business which aren’t directly attributable to production or providing the service must be minimized. For example, compensation takes a big bite out of your operations budget, so monitor staffing needs relative to sales and adjust them, if necessary. Since you can’t eliminate marketing expenditures, you can review your sales levels relative to them and ensure you are getting the best bang for your buck.

Establish a foundation

If you are trying to build the foundation for a healthy, long-lived business, focus on these three keys. Without a foundation, the business will fall just like anything you are building.