Reaching Financial Sustainability
When it comes to money, socially minded entrepreneurs are quick to discuss their ethics.
They talk about profit distribution philosophies and remind you that the purpose of the business isn’t to make money.
Unfortunately, this is to their own detriment.
A business is not kept alive because it has a nice philosophy.
It’s kept alive because it has enough cashflow to cover all of their bills.
And if you want lasting impact, you need a lasting stream of income, which means working out first and foremost how the money will roll in.
There’s a term that gets thrown around very casually in such meetings:
What does it actually mean?
That depends on who says it.
If it’s a startup entrepreneur, it’s code for “I know I eventually need to be able to pay myself, but that’s much further down the road”
If it’s a not for profit or large company, it means “We need this idea to somehow become a cash cow, so that it can also fix the other parts of our organisation that bleed money”
Both of these have a sense of mysticism; as if saying the words enough times will magically make the idea profitable.
I don’t buy it.
Financial sustainability takes a lot of deliberate work.
Let’s start with the theory, then get to the details.
What does sustainability look like?
Money is one of those things in life that you don’t notice until it’s not there – like oxygen or public toilets.
For this reason, sustainability is when you’re proactively looking at the numbers, so that there are no terrifying surprises or scrambles.
Firstly, financial sustainability means your business is not sensitive to small changes.
This might be a small increase in expenses, a small drop in market prices, losing a staff member, losing a large customer, needing to suddenly pay for equipment upfront, or spending money on a project before you receive payment.
Each of these are annoying, but don’t have to be crippling.
Secondly, financial sustainability means you have “levers you can pull” when something starts to go wrong.
If you imagine running your business is like flying a plane, it’s about understanding which controls allow you to go faster or slower, higher or lower, drop the landing gear or enter a holding pattern.
The cockpit is full of buttons and lights, and you need to understand what they all do.
In business terms, it’s about knowing how to boost sales, how much you can raise prices, which costs you can cut without damaging the brand, or where you can hire replacement staff.
For example, if your sales suddenly dry up without explanation, you know how to spend more on marketing or sales meetings to drive those numbers back up.
Or in the case of staff, you know that if a key person leaves, you’re able to afford a suitable replacement.
This is what gives business owners, investors and board members the ability to go on holiday – knowing that the company can take a modest hit and keep chugging along.
How do we get to that point?
No single article can describe all these elements in depth, but we can look at the range of things you'll need to consider.
This might not seem like much fun, but there's probably something here that could save you a lot of pain in the future.
Here are the helpful questions that will make your enterprise more resilient:
How deep is our market?
There needs to be a steady stream of customers if you’re going to keep adding sales.
You're also removing customers from the potential pool each time they make their first purchase, and you don't want to run out just as you're scaling up.
How quickly can we add more customers? How much does this cost?
You want to be confident that $100 spent on marketing can add more than $150 worth of sales.
If you can’t add customers quickly, or measure how much each acquisition costs, how will you know if it’s worth doubling your marketing?
What steps can we take to ensure our customers are happily retained?
If you’re expecting your current customers to stay loyal and delighted, you’ll need a system that keeps you front of mind and consistently exceeding expectations.
Otherwise they’ll go elsewhere.
How much margin do we make from each sale?
You need to know how much each sale contributes to your business – both the gross margin and the net margin.
In fact, it might be that your smaller sales generate more margin than your large sales, and that should cause you to adjust your strategy.
What are our fixed costs? How many sales do we need to make in order to break even?
By understanding your fixed costs and your margin per sale, you can track how close you are to breaking even, and keep an eye on your profitability.
This means you have an early detection system when small changes begin to erode your buffers.
Are our prices set at the right amount? What would a small drop or increase do to our overall sales?
It may well be that a price drop will boost sales.
It also may well be that a price rise leads to a small number of customers leaving, but the bulk of your fans provide more revenue than ever.
Either way, you want to have an informed view as to why your price is what it is, and assess the pros and cons of making a change.
Where do we go to get great staff? What’s the market rate for the kind of people we need?
One common challenge is that a social enterprise builds a great team, they have success, grow the business and suddenly can’t find enough great people who get the culture.
Either that, or the great people are too expensive.
You want to be confident that you can pay for the right people, and treat discounts as a bonus.
Otherwise, when a great person leaves, you’ll struggle to replace them at a low salary.
A business that relies on good people taking big pay cuts isn’t sustainable.
When times are tough, which costs are the first to go?
This is a great example of the “levers you can pull”.
Which costs can be jettisoned in a hurry?
How quickly can you fix a cashflow issue when urgent issues arise?
When times are good, where do we put our surplus?
I bet you have a lot of worthy things to put your surplus towards – like equipment, hiring new staff, donations to your cause, product development or repaying investments.
Just have a think about the order of those priorities
What is our margin of safety? What’s the least it would take to burn it all up?
Think of it this way – are there combinations of minor issues that combine to create a major headache? It could be a late invoice, a cost increase, adding an extra team member, losing a key customer, etc.
By keeping an eye on your margin of safety, you avoid getting caught off guard by the inevitable hiccups every business experiences.
Which fixed/upfront costs can we make variable? Who can we partner with?
Chances are you don’t need to own every part of your supply chain, and the less you’re responsible for, the lower the obligation and pressures.
Are there other partners out there who could take some of that weight off your shoulders, so you just have to pay for what you use?
How much does it cost us to apply for a grant? What percent are successful? Is it worth employing someone to take grant writing seriously?
Yes, a business can be reliant on grants and donations to survive, if you treat your funders like customers.
That is, you have a strong pipeline and a talented writer/relationship manager.
It might well be that it takes you $10k of time and effort to apply for a $50k grant, which you have a 5% chance of winning.
Worse still, it might then take another $20k of effort to achieve the grant’s requirements.
If you can quickly do a cost/benefit analysis, it might help eliminate the expensive timewasters and highlight the real opportunities.
Advisors and consultants will have their opinions as to exactly what answers or figures you should have for each of these questions, but there are no concrete rules.
What’s important is that you’ve thought about each of them, conducted some experiments, had tough conversations with your team, and you’re on the same page.
Financial clarity creates financial peace.
If you build a system that can respond to bad news, you’ll have made your organisation financially sustainable.