2 min read
Before you start a business, you need to ask yourself one straightforward question : is my business profitable? To answer this, you need to know what makes a business profitable.
Ultimately what makes a business profitable is having an income that is significantly higher than its outgoings. Generally, making this happen involves a combination of maximising revenue and minimising expenses. Maximising revenue is usually more important as there is typically a limit on how far expenses can be minimised.
Start with why
Before you can start thinking about how to make your business profitable, you need to ensure that you actually have a viable business. A viable business has to have at least one characteristic that sets it apart from all other businesses out there. That’s the reason why people should choose to spend their money with you rather than somebody else.
Very few businesses can offer truly unique goods and/or services. Most businesses, therefore, have to define themselves by the way they deliver their goods and/or service. For example, they may have a unique location or open when other businesses are closed.
They may have a unique approach to customer service. For example, they may continue to offer a phone number when competitors only offer email support. There are all kinds of ways you can define your business other than just competing on price. Competing on price can be an effective strategy but it can also commit you to a long-term race to the bottom.
Work out how you will make money
There are all numerous business models you can adopt. Ultimately, however, most of them boil down to one or both of two key strategies. These are the subscription model and the ad-hoc payments model.
With the subscription model, customers make recurring payments to continue to receive a product or service. With the ad-hoc payments model, also known as the pay-as-you-go model, customers buy what they need when they need it. Ad-hoc payments may be made in instalments, but they are still ad-hoc payments.
Modern businesses increasingly aim to combine the subscription payments model with the ad-hoc payments model. This gives them a core revenue stream plus opportunities to earn more income through, for example, upselling and cross-selling.
Work out how you will collect money
Your choice of payment channel(s) can do a lot to make your business more profitable. At a minimum, you need to ensure that you’re using a secure payment method. It’s generally very much preferable if you can use a cost-effective payment method. Ideally, you should use a payment method that minimises friction for your customers and administration for you.
Direct Debits tend to win out on all three points. They are highly secure, very cost-effective and very easy to use through GoCardless. Furthermore, GoCardless integrates with many popular accounting packages. This makes it possible to manage everything to do with your payments from your regular accounting software.
Develop robust processes
A lot of success in business ultimately comes down to basic organisation. When you are starting out, you may, technically, be able to manage everything yourself. Even then, however, you will probably find that you are actually delegating at least some of your tasks to computers. For example, you may use filters to help control your email.
As your business grows, however, you will need to get extra help. It’s irrelevant whether that help comes in the form of staff or freelancers (or more technology). You absolutely must develop robust processes to keep everyone (and everything) working together towards the common goal of improving your business and making it more profitable.
What’s more, you should expect to have to keep reviewing and updating these processes regularly. You will almost certainly need to rework them as your company grows. You may also need to reflect legal and/or regulatory changes. Doing this may not be particularly exciting but it really can make a huge difference to your company’s bottom line.
We can help
If you’re interested in finding out more about what makes a business profitable, then get in touch with our financial experts. Find out how GoCardless can help you with ad hoc payments or recurring payments.