Some business consultants use the Front Door/Back Door analogy to describe the two factors of business profit.
- The Front Door is the money you make. Your revenues from what you sell.
- The Back Door is the money you spend. The expenses associated with selling what you sell.
It’s easy to be more excited about the front door. That’s where the new customers, sexy marketing and expanding product line are. It’s where you interact with the product, service or expert knowledge that drew you to your business model in the first place. Bottom line: the front door is more fun. The back door is about details, and spread sheets and math. It’s less fun for more people.
So it should come as no surprise that many small businesses with a profit problem are doing fine at their front door, but leave the back door wide open and unsecured. If your profits aren’t performing like you want, check your operation for these deadly spending mistakes to see if you need to get your back door fixed.
- Not Tracking Expenses
Don’t be embarrassed to admit that you resemble this remark. Running a small business takes a lot of immediate time and effort. Tracking expenses falls into the “important, but not urgent” category that many entrepreneurs and managers never make time to address.
Without knowing where your money is going, you can’t begin to control how it flows. Fix this problem by tracking expenses by category and/or department, and mapping it to an ideal budget for your business. This will give you specific points to address, each of which makes a difference to your bottom line.
- No Spending Goals
If you’re even moderately successful, you almost certainly have earning goals and sales targets. You might even be meeting and exceeding them each quarter. But without similar spending goals that encourage you and your staff to save on expenses, that money the earning goals brings in can fly right out the back door practically unnoticed.
After tracking what you spend, research what each item in your budget should cost the company. Identify your worst three or four offenders (every business has a few) and hammer them into shape right away.
- Never Renegotiating
A deal may be a deal, but your business is your business. Almost all of your current vendors would prefer to make a little less money from you each month than lose you as a customer altogether because you’ve closed or gone to another supplier. This is even true of long-term contracts you’ve signed. A 10 percent reduction in a regular line item can mean serious and reliable savings over the course of a year.
Promise yourself you’ll attempt to renegotiate two expenses in the next quarter. If necessary, put your best sales guy on it. After all, convincing somebody to give you something for less than you’re paying now is just another kind of selling.
- Untargeted Marketing Buys
Once upon a time, all marketing was untargeted. Sure, you could take out an ad in a specific magazine or on a TV show with reliable demographics, but that was still a shotgun approach that resulted in lots of wasted money.
Today, marketing can be hyper-targeted to match search habits, neighborhood, gender, occupation, even other things an individual has purchased in the recent past. We’re not going to say you should pull all of your advertising dollars out of broadcast marketing, but you should be spending most of your marketing on targeted approaches to qualified leads.
- Buying to Impress
While it’s true that only homeless shelters should look like a homeless shelter to people as they come in the door, the opposite mistake can be just as deadly. Your business doesn’t have to look or feel as slick as the deep-pocketed multinational competition – you really aren’t chasing that client base anyway.
It’s hard to repair this spending mistake going backward, but you can stop it starting today. Don’t upgrade things without a clear understanding of how they positively impact your bottom line. Be especially careful of buying to impress yourself. You’re certainly worth a $1,000 chair…but you don’t need one.
- Buying Too Cheap
The lowest price tag usually isn’t your best option because it’s almost never really the lowest price tag. Consider two choices for an office chair. One costs $100, while the other costs $60. If the $100 chair lasts twice as long as the $60 chair before it needs replacing, the high-end chair is actually the cheapest option. And that doesn’t even address how much nicer sitting in the more expensive chair feels all that time.
You might not be able to correct this mistake immediately if your profit situation is dire, but keep it in mind once you’ve fixed other errors on this list. Investing in quality people, supplies and equipment puts you in a position to succeed in the long term.
None of these mistakes will necessarily kill your business on its own, but any could be that last little weight that makes the whole enterprise untenable. Fixing them both improves profits by cutting immediate expenses and frees up funds for investing to further grow profits in the future.
Repairing some of these mistakes doesn’t just take time and effort. It can require money in the form of hiring professionals, training staff, or buying new software or equipment. If (because of your back door problem) you don’t have the cash reserves to make those repairs, apply today for a Kabbage small business loan or revolving line of credit. We can get you the cash you need today for higher profits tomorrow.
Have you made some of these mistakes in your business? How did you discover the problem and what did you do to solve it? Tell your fellow Kabbage Community members about it in the comments so they can learn from your mistakes. Leave your questions, too, and become part of the conversation.