When you’re just starting out in business, it’s a safe bet that you need more clients. But what if you’ve been up and running for a while, and you’re still not making as much money as you would like? You may be in the habit of thinking that attracting new clients will be the answer, but this isn’t always the case.
There are many reasons why a self-employed professional might not be earning enough, but the reasons typically fall into four categories: not enough revenue, not enough profit, not enough clients, or not enough time.
Start by looking at your gross revenue — the total amount your clients pay you over the course of a year. How does it compare to others in the same line of business? Ask some trusted colleagues or check with your professional association for any statistics they may have.
What percentage of your gross revenue remains after you cover your cost of sales? This is your gross profit. As a service business, you may have no cost of sales. If, however, you are accepting credit cards, using an online payment system like PayPal, or selling products such as books or courses, your payment processing fees and costs of producing your inventory need to be deducted from your earnings before making other calculations.
Now deduct your business expenses from your gross profit. What percentage of gross profit remains? Is this a typical percentage for your industry?
Try to gather comparable data from colleagues, your professional association, or a published source like Dun & Bradstreet’s “Industry Norms and Key Business Ratios” (available through many libraries). If you can’t find appropriate guidance from any of those sources, make an estimate by comparing your profit margin (net income divided by gross profit) to a desired goal of 70%.
1. Not enough revenue. If your gross revenue seems low for your industry, but your profit margin is at least 70%, and you have about as many clients as you can comfortably serve, concentrate on increasing your revenue, rather than trying to improve your profit margin or just bring in new clients.
Consider raising your rates, which may mean finding a market that is willing to pay more. Look for clients with deeper pockets who will hire you for higher dollar volume engagements or purchase more expensive offerings. Think about hiring more administrative help, which would free up more of your time to charge out at professional rates.
You might also consider increasing your passive income by selling products created by you or others, reselling some of your existing work, or licensing a process you have developed.
2. Not enough profit. If you are spending more than 30% of your gross profit on business expenses like overhead costs or marketing, work on improving your profits. Look for ways to cut expenses by reducing your overhead, or focusing on your most profitable line of business.
In addition, if more than 15% of your gross profit is spent on marketing alone (assuming you are already past the start-up phase), consider cutting back on paid advertising or mailings, and using marketing strategies that focus on building referrals or attracting clients through writing and speaking. Seek out clients who will give you repeat business or long-term contracts.
3. Not enough clients. Low revenue combined with not enough paying work to keep you busy means you really don’t have enough customers. If you don’t have a marketing plan, it’s time to create one. Focus your plan on the most attractive services you have to offer and the most lucrative market, rather than diffusing your energy by marketing several different service lines to more than one type of customer.
If you already have a marketing plan, but it’s not paying off, you may need to break into a new market, look for a more appealing way to package your services, or form an alliance with someone who can send a steady stream of business your way.
4. Not enough time. It’s possible that you simply don’t have enough time to earn more revenue. When you are consistently spending over 25 hours per week serving clients, with more potential clients in the pipeline than you can realistically serve, it’s time to hire admin or marketing help, or bring in a junior partner.
If you’re not ready to take that step, think about subcontracting work to a trusted associate, and keeping a percentage of their billings.
In reading the suggestions above, you may have discovered that you don’t have enough information to diagnose your earnings problem. There are six statistics every self-employed professional should know: revenue, expenses, profit margin, number of clients, average sale amount, and amount of time spent doing paying work. If you don’t have the answers, start tracking these measurements today.