Monitor The Model: surviving tough times in your small business

Kirsty Young Advice and Tips, Business Growth

You won’t have to go far to read, hear or see that the UK is going through a somewhat challenging financial time. As a result, the small business world in 2023 can be a tough place to operate.

In our role as business accountants, we speak to company and business owners daily who are experiencing issues such as:

  • Increased costs from their suppliers
  • Increased wage demands from their team
  • Customers concerned about their own spending, and therefore more price (and/or value) conscious

These issues (and plenty of others we could list) are causing a reduction in profits, or in extreme cases, causing their businesses to become no longer viable.

 

What is your model?

With this in mind, we want to share an exercise we’ve found very useful with business owners, the Monitor The Model exercise.

This involves looking closely at the ‘model’ of your business. (Rest assured, this sounds way more complex than it actually is!) Your business model is simply the way you do business: the how, the what and (to some extent) the why.

Our Monitor the Model exercise is simply about stripping your business back to these basics, and checking what you find against two crucial criteria :

  • “Does it work?”

and

  • “Does it make a profit?”
  1. If the answer to both is an unequivocal “yes”, that’s great! Carry on as you are!
  2. If there is even a hint of a hidden “Yes, but…”, the Monitor The Model exercise will help you identify what you may need to change, update or eliminate to improve your business model.

 

Let’s get started

You may find the Monitor The Model exercise easier using a spreadsheet than on sheets of paper, but whatever works for you is fine!

First get into a quiet space free from distractions where you can knuckle down and concentrate.

Then, ask yourself these key questions:

🗝MAKING MONEY

How does the business actually make money?

This is a biggie. Work out where your turnover/profits actually come from. For example, your best-selling product or service may not actually make you the most money. (More on this below).

How much money do you make per product/service sold, after deducting the costs of delivering this?

These are the costs for getting the product out there to a customer. So if a customer buys one of your widgets for £20, which costs you £10 to make in materials and labour costs, and costs you £2.50 to package and post it, your ‘gross’ profit per profit sold is £7.50.

If you are VAT registered, be sure to take out any VAT on your income when doing this quick maths.

Given how many products you are selling, or services you providing, what money is really being made after deducting the costs of delivering this?

Take your gross profit per unit that we worked out above. Multiply that by how many products/services are you selling right now to figure out your total ‘gross’ profit. (Monthly or annually, whatever is most useful to you).

Are you making less ‘gross’ profit than you used to? If so, why?

You may find that your staff costs have risen, the costs of materials have gone up, or you felt you needed to reduce your prices to stay competitive.

🗝 OVERHEADS AND PROFITS

What are your overheads?

To work out how much you really make, you need to know how much your ‘overheads’ are. Overheads are things you need to pay for every month even if you don’t sell a single item. These include:

    • office or workshop rent
    • business rates
    • telephone and broadband
    • energy bills
    • staff wages
    • accountancy
    • marketing and advertising costs
    • website maintenance and hosting
    • any fixed regular cost, such as business organisation membership

Taking your ‘gross’ profit you worked out above, now deduct your overheads. What is left is your ‘net’ profit.

In our widget example above, what is left over equates to £7.50 per widget sold. How much is “left over” is dependent on how many you sell. Whatever that figure is, say on a monthly basis, deduct your monthly overheads and see what money is left over! This is your ‘net’ profit.

If it’s not making any money, how should it be generating profits?

This is a tough one. Be honest with yourself. If you should be making money by selling products, why are you not selling them in sufficient numbers to make money?

🗝 REDUCING YOUR OVERHEADS

One way to work out how to increase your profit is to review your overheads, including business equipment. Consider:

– Do you need everything you have?

– Could your business operate without some of it? (This could save you on operating and replacement costs.)

However, be careful not to dispose of too much as replacing it or outsourcing could be expensive. Take time to read Dan’s more thought on reviewing overheads in this blog.

🗝 YOUR EMPLOYEES

When you created your business, how many people did you think you would need?

Most businesses start small with the owner/s and a handful of employees at most. As you grow, you might have ended up with more or less staff than you thought.

Think about what you thought you would need to do the tasks required to operate. In an ideal world what should it look like? Then….

Comparing this initial staff number to your current staffing levels, have you got the right number of employees to successfully deliver the service/products?

If the answer is yes, and they are not overstretched, then it’s likely you have the right number of staff to successfully produce your products or services at your current level of activity.

If no, think about the reasons why.

    • What tasks are being done that you never envisaged?
    • Do take things take longer than expected?
    • Did you have to pay more for the people you needed?
    • Are the process, systems and people working efficiently?

Did you get the ‘model’ wrong?

This list isn’t exhaustive but gives you some food for thought. Hopefully you will then come up with some action in terms of improving the business in this area.

🗝 UPTURNS AND DOWNTURNS

Now it’s time to think about:

Could the business survive a downturn in income if times got tighter?

We’re back to overheads and profits again here. How low could income and/or profit go? How many employees would you require for your business to remain viable?

What about if you actually got busier during this time (happens a lot more than you think)? How would that look?

Let’s think positive here. If your business is successful, your staffing needs will inevitably increase as your order book and/or client list grows. It’s important to ensure you have enough staff with the right skillsets so that your growth isn’t limited, and you can serve all your existing and your new customers/clients too.

🗝 PAYING YOURSELF

This is the kicker. Many new business owners pay everything and everyone except themselves at the start. They say they will pay themselves “when things pick up”. You must factor in your own pay from day 1, otherwise you will never know when (and if) you are making a true profit.

With that in mind….

When you deduct your overheads from your gross profits, is there money still left over after paying yourself?

Hint: the answer should be yes!

 

How are you getting on?

Now you’ve started on this exercise, you probably have raised more questions that need answering. That’s why the Monitor the Model can be an eye-opening, and hopefully fun exercise to do!

From here on, you can now think about what action to take.

  • Does the ‘model’ need changing?
  • Can you actually make money with your existing model?
  • If not, how will you change it to ensure you do make money?

A note of caution: just because your business model isn’t making money today, it doesn’t mean you should chuck it all out and do things completely differently. Don’t throw the business baby out with the bathwater.

Instead, book some time in your diary to take a few hours out to look at your business every month (or even every week) and plan how to implement the changes required. Incremental change across the daily routine of business is often better than the upheaval of a sudden, massive change that is disruptive to business.

Take your time to assess your business and really get under its skin. Time spend on your business, not in it, will always pay dividends in the long run.

 

I’m still confused about my business model

We’re not business change consultants, but there is an amazing amount of help and advice we can offer just by looking at your business finances. If you don’t have an accountant, or feel yours isn’t helping you understand and grow your business’ finances, we’d love a chat about how we can help.