If you’ve ever started a small business, chances are you did it not only to pursue a work-life of interest, but also to make money, of course. And, if you’re like most other small business owners, once you’re running an established business, you’d like to make more money.
Almost all small business owners we encounter think that they can be more profitable, or feel they need to be more profitable to stay afloat, but they’re not quite sure how to get there.
So, what’s holding them back? It’s likely resources. Read on to learn what these ‘resources’ include, and some symptoms to look out for if you think your own resources might be holding you back.
What are resources within a business?
The simplest answer is that resources are capital. Most small business owners think their capital is only money, but it actually includes any assets as well. While cash is generally the primary type of capital for a small business, it’s also important to remember that any equipment your business uses, and even your staff, should be considered capital. I bet you’ve heard of “human capital” — and that’s basically the manpower available from the people you employ that has a value to your business. Capital can even include institutional knowledge that you as a business owner have that can help you run your business efficiently and effectively. To think of it more broadly, capital includes any of the assets within your business — and these are all resources that are available to you.
When capital within a business is underutilized, there are often symptoms or warning signs that can indicate a change is needed. We’ll review some of the most common symptoms below, and how to determine when your resources are holding back your business from meaningful and sustainable growth.
Symptoms that suggest your resources are being underutilized
1. Excess money in the bank
When there’s money just sitting in the bank, it’s not doing anything for you. As a living, breathing, growing business, you want every bit of the money you have to be working for you, to help you live, breath, and grow more fruitfully. So, if you’ve got money sitting dormant in the bank, why not invest it back into your business, which can help your business grow to the next level? Business growth is not always gradual, and sometimes you have to take a big leap to get to the next stage, so you want all facets of the business to be working towards that next level. By actively planning for how to use your capital, you can find a way to make it work more effectively for you.
Let’s look at an example: most people think that if they have cash available, it’s better to use that in their business than to borrow for any financial needs, because the cash is money that’s readily available. But, if you consider the fact that the stock market has an average rate of return of 12% (which is a pretty conservative average), and you can borrow money at a rate of 5%, that means that even if you borrow more money and invest what you’ve already got, you’ll still be gaining 7% instead of losing those potential earnings by using your liquid cash. When you think about finances this way, you’re starting to think proactively and make really smart financial decisions for your business.
2. When you’ve taken out multiple business loans and have little to show for it
Your debt-to-equity ratio can also be a strong indicator about the state of your business. When considering your business’ debt-to-equity ratio, it’s important to make sure that you’re not over-borrowing. When seeking lending from a bank, that’s typically going to be their biggest concern — how your business is balancing debt and equity. When your debt-to-equity ratio is heading in the wrong direction, that usually means you’re taking more money out of your business than you’re actually making, and banks want no part of that. To remedy this, we work with clients to help them develop a favorable debt-to-equity ratio which enables them to more easily secure funding for the next growth stage within their business.
The optimal mix of debt and equity varies based on industry, which is why it’s so helpful to work with a business consultant with years of expertise. We can pull and analyze data about other businesses of your size, and within your industry, to see what their debt-to-equity ratios are to start to gain an understanding of industry norms and expectations. This becomes a component of your growth plan and will help us to strategically move you towards the right mix of debt and equity.
3. Your staff’s capacity isn’t being utilized appropriately
Human capital, as discussed earlier, is a vital part of any thriving organization and must be both utilized and supported appropriately. Often when a small business owner is considering scaling, they may fail to consider the implications of that growth on their staff. Burnout can become a real problem which can cause employees to leave, which will require backfilling those vacated positions, and ultimately onboarding and training new staff. This process eats up a lot of time and resources, so it’s best to try to avoid this at all costs. Especially in industries with very low unemployment rates, we work with clients on staff retention, and how they can keep their employees engaged and content. Oftentimes this means offering a comprehensive and attractive benefits program or implementing an employee appreciation program.
Conversely, when we find a company where staff has an excess of time that they can’t fill, that’s a sign that either delegation is not happening as it should, or you’ve got too much staff on your payroll. Our ultimate goal is to help you fully utilize the staff you have available, so you’re not over-paying for staff that aren’t busy, but you’re not running the staff that you do have into the ground.
4. Your production is not running at full capacity
Another indicator that you have underutilized resources is when your fixed assets (like equipment) aren’t running at full capacity. This means you’re likely paying too much for equipment that has a greater capacity than you can use or is simply too large for the demands of your business. If your goals are to increase production capacity, then this could signify an opportunity for growth, but if your goal was to actually work less, then you’d likely be better off with less expensive equipment that could put more money back into your pocket. Many business owners think that more capital is always better, but the reality is that you want the right amount of capital, and you want to make sure you’re using it as fully and completely as possible.
The Takeaway
There are a lot of moving parts within your business, capital included. When looking to scale or grow, there’s always a fine balance to strike with your capital utilization. It’s easy to have too little capital, but you can also have too much. When you’re looking at things with a growth mindset, it’s important to use available capital to grow your business so that you can maximize your existing resources without needing to go out and get more. A lot of successful businesses still want to pursue further growth, but they’re not utilizing their capital to its full potential and that’s where we come in. We’re able to look at the current resources available in your business and determine how best to put them to work.