“Generating and maintaining margins is really important.”
New entrepreneurs may see that statement as obvious, but experienced business owners know it’s wise advice and more difficult to maintain over time. It’s important to keep focused on margins even as your business grows in size and complexity. Don’t forget; “Make more money than you spend.”
Like most businesses, the biggest expense is people, but as long as you bill clients more than you pay employees, the path to profitability is straightforward.
This changes over time. The needs of clients vary, and employees evolve too. Not every employee can do the same type or amount of work. The more people involved in a project, the more overhead there is. That variability means it gets harder to bill the right amount for the work done.
Pricing and cashflow are key to success.
The Unit Economics of a Growing Business
Let’s start with a typical service business model like KLT. Each business is different, but most of the underlying principles are the same. Customers sign up for a service plan, e.g. monthly management accounts. If recurring in nature we can plan ahead for the resources required to do the work, namely employees.
Think of each service line as a unit of value. Customers pay for the service, not hours, so this is how to approach both the workflow and the accounting.
“Estimating how long it takes to do the work is hugely important,” says Chantelle. “By roughly measuring how long it takes each teammate to complete one job it helps us decide how to distribute the work each month. We also need to take into account the employee’s experience as this often influences the time spent.”
Subcontract or Employ?
“Employees make our business more predictable, but not because of the regular expense of salary. It’s time. I know we have a fixed number of hours per week per person. I can measure that against productivity and revenue generated. It also means we can invest in training and culture, two things that make a big difference in the quality of the work we do. The longer a team member works here, the better the work and the better our margins. I want this to be a great place to work.”
Cash Is a Constraint for (Nearly) Every Business
Finding, hiring, and keeping good employees is what makes a business like KLT succeed. It also means we need to hire ahead of growth so that we have employees to do the work when we bring on new customers.
Steady growth is the goal. As a small business, we can’t hire too far ahead of growth because of the cash constraints. And we can’t take on new customers without employees to do the work. This means maintaining a cash balance is imperative to driving steady, linear growth.
More customers, more revenue and more employees has made it harder, not easier, to maintain the margins we’ve worked so hard to earn. “My advice is to keep an eye on costs. For example, we factor in accounting software costs when quoting for work as this is a direct hit on our margins”.
So, to conclude, growth whether organic or planned can be complicated. If you are planning the expansion of your business or dealing with unexpected growth and need a little help, give our team a call. We are always happy to help!