Lacking Profit? Try These
What should you do?
I frequently get asked what’s the best path to become profitable. Sometimes, what’s really meant is the fastest way to profitability.
There’s no such thing as one-size-fits-all financial advice; but what the heck, I’ll share mine anyway.
Here’s my “quick fix” list to rapid profit improvement:
Situation + runway
Find the crown jewel
Review pricing strategy
Analyze my cost structure
Double down on sales & marketing
Remember, our goal is to safely and quickly get to profitability.
1) Situation + runway
The best place to start is easily overlooked. In short, how much time do you have to execute a proper plan?
Part of the equation is the situation or context of your business — What industry are you in? Are you an established business or brand new? Do you have lots of debt or a clean balance sheet? Are you bouncing around profitability or sustaining heavy losses?
Part 2 of the equation is your cash runway. Take your cash on hand plus any available resources (LOC, personal cash, etc.) and divide it by your estimated monthly losses. In short, that’s how long you have to hit breakeven, so mark it on your calendar.
Why should you start here? It dictates your plan of action. More runway allows you to be methodical and strategic. A short runway might require dramatic (and sometimes painful) changes.
2) Find your crown jewel
This is one of my favorite Charlie Munger quotes:
“I’ve had many friends in the sick business fix up game over a long lifetime. And they practically all use the following formula I call it the cancer surgery formula:
They look at this mess. And they figure out if there’s anything sound left that can live on its own if they cut away everything else.”
What does it mean to find “anything sound” and “cut away everything else”?
Most businesses have at least something going right. Maybe it’s a high margin product line, or customer segment, or geographic territory. You need to find it and do more of it. Everything else should get deprioritized. (I’ve previously talked about this topic here and here.)
3) Review pricing strategy
Pricing is one of the “easier” levers to pull in a push to profitability.
Don’t “just raise prices by 10%” though; first check where you stand in the marketplace. How does competitor pricing stack up? What are your differentiators? Have you talked to customers (maybe they feel pricing is too low/high)?
Or you could take a purely quantitative approach and calculate the level of price increase required to achieve profitability. Maybe you’re losing money at $80 per unit but breakeven at $100 per unit.
4) Analyze cost structure
Perhaps the most underrated step of them all. Whether profitable or not, you need to know your cost structure. Full stop. That analysis includes:
Knowing your fixed costs
Knowing your variable costs
Knowing your breakeven sales level / units
[Plug: we’re hosting a session on cost structure analysis this Tuesday 3/25 at 1pm ET / 10am PT; reply with “Costs” to learn more.]
5) Double down on sales & marketing
Only after you’ve done the previous steps should you throw your weight into growing revenue.
Why? It’s possible (correction: easy) to add unprofitable revenue to your business, especially when you’re desperate! Doing these other things first will give you a better picture for the right sales and marketing efforts to get over that final hump.