Do you ever feel as though you’re lacking passion for what you do? Some people…
A Soloist Can Make Beautiful Music
Would you rather have a business with an annual revenue of $300k running at an 80% profit margin, or a business doing $2.4m in revenue at a 10% profit margin?
With a profit figure of $240k in each of these scenarios, your bottom-line outcome is the same, but those businesses are very, very different beasts.
The banker’s mantra.
You may have heard the saying before known as The Banker’s Mantra, which goes:
“Revenue is Vanity, Profit is Sanity.”
The essence of this saying is to highlight that revenue, i.e. sales, turnover, income (whatever word you prefer) is about ego, but profit is what really matters.
(Note: there is a third element that is often added to this saying, being ‘Cash is Reality’ or ‘Cash is King’, depending on where you read it, but that’s a topic for another time.)
A soloist can make beautiful music.
One person on piano or guitar or a violin can make beautiful music. A big band with 15 musicians can also make beautiful music, but is it necessarily better than the soloist? No, it’s just different. Business can be a bit like this too.
Let’s do a quick check on some numbers. Whilst there is a limit to what can be achieved, it’s entirely possible for a one-person operation to generate reasonable revenue at a high-profit margin.
For example, an accountant, lawyer, engineer, trainer, marketer or project manager could bill 1,500 hours per year at $200 per hour working from home, which works out to $300k per year with a very low cost-base. Or someone selling high margin products such as online training courses, information products or imported goods with a high mark-up could generate similar revenues and profit margins.
Another key advantage of a one-person operation is that a small number of key clients providing good quality, high margin work can sustain solid revenue by word-of-mouth and referrals, sometimes without the need for intensive marketing.
Bigger isn’t always better.
Now let’s compare that lean, efficient, one-person operation to a business with 15 staff, each generating an average revenue of $160,000 per year, per person. This works out to a total revenue across the business of $2.4m per year.
Fifteen staff won’t all fit in your loungeroom, so you’ll need space to put them, which means paying rent for a decent office, or buying some space. It means a big payroll and a salary bill that will keep growing every year. It means more utilities, computers, IT systems, phones, software, vehicles, company lunches, payroll tax, increased insurance premiums and more.
The list goes on and on. It means human resources issues, recruiting costs, staff retention challenges, staff performance issues, people management and more.
As well as the added overheads that come with a bigger business, there’s also a lot more mouths to feed, requiring a steady flow of new work just to cover basic costs and keep the doors open. And this can sometimes lead to poor decision-making by accepting lower margins for fear of missing out on the work and the resultant impact on your all-important revenue.
This is not to say that it’s not a good idea to grow your business, but simply that it should be a conscious decision and that you should do it with intent.
If you do decide to grow, make sure you do the analysis, make an informed decision, develop a strategy and follow a plan. Don’t just grow by default. There are certainly benefits associated with running a bigger business such as brand power, reputation, the scale of projects and type of work you can do, so if it’s a good fit for your business, then go for it!
But do it with eyes wide open and a clear vision for your outcome, don’t just let it happen on auto-pilot.
Good things can come in small packages.
This article was prompted by a conversation I had with a friend, a car interiors specialist who a few years ago ran a big auto workshop with 20 staff located in a swanky (i.e. expensive) suburb of Melbourne.
After years of struggling with customer problems, staff issues and massive overheads that eroded his margins, he decided to close that business, move to a small workshop in the outer suburbs (i.e. cheap) and work solely on his own, only for his best clients. Today, he’s making more profit than he did in his 20-man business, with much less stress.
The old saying of ‘Good things come in small packages’ can certainly apply to business.
Being a soloist or micro-business could actually generate more profit for you than if you make the jump into growing a bigger business.
“The opinions expressed by Smallville Contributors are their own, not those of www.smallville.com.au"
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