Cash is king, especially for small businesses. Want proof? Read on.
We’ll get to some revealing data shortly. First, let’s think about the average day running a small business. Imagine, for example, you operate an independent restaurant. What expenses do you need to account for?
For sure, you’ll have to fork out for rent or a mortgage, equipment, insurance, ingredients (many of which are perishable), and all the costs associated with having employees.
That’s a lot of liabilities, so you really have no choice other than getting enough customers in the door to cover those costs, and then some. After all, you go into business to earn a decent living on your terms, right?
There are a lot of tricks to managing expenses, but we’ll tackle those another day. In this post, our goal is to uncover some interesting numbers that explain exactly why revenue is so critical for small businesses.
You can only cut expenses so far; at some point, you have to focus on growth. Here are three data points that explain why revenue is so crucial.
1. 21% of SMBs would shut down within 30 days if sales stopped entirely
As a general rule, businesses (and individuals) should always have cash reserves on hand to cover three months of expenses. So, how many small businesses pass the three-month savings test? Answer: not many.
This fall, we surveyed about 2,300 small business owners in all 50 states to see how they evaluate and prepare for significant threats to their companies. We were surprised that 21% of respondents said their companies would go out of business within a month if sales stopped, and 78% would last less than six months.
Take a look:
How long would your business last if sales stopped entirely
In fact, only 44% of small business owners feel confident in their ability to keep their doors open for at least three months if revenue stopped altogether. Some of those 44% might have a line of credit, and others might have cash stockpiled.
In any event, most small companies live on a razor’s edge with regard to cash on hand, which is one reason why consistent revenue generation is so vital.
2. The average profit margin for U.S. businesses is only 6.22%
Small businesses are notoriously thin-margin enterprises. As evidence, look no further than this research from New York University. The chart shows profitability of the average business in a whole bunch of categories. Across industries, average net profit is 6.22%.
Let’s make this real. Take a look at the “net margin” column. That’s the money a business keeps after removing all costs, expenses, interest, and taxes. It’s a pretty good proxy for the income a business owner would keep after paying all the company’s bills.
Let’s go back to our restaurant example. According to the NYU data, restaurant businesses typically have net margins of 9.2%. The median small business in the U.S. has annual revenue of $390,000. That would mean the restaurant’s owner would take home less than $36,000 in net profits.
That’s only 60% of the median household income of $59,039. That’s a paltry return on the incredible amount of work that goes into running a business. Is it any wonder revenue weighs heavy on Main Street entrepreneurs whose business income and personal income are one in the same?
3. Making enough money is the #3 worry for small business owners
Earlier this year, we polled nearly 3,000 small business owners in all 50 states to see how optimistic (or pessimistic) they were feeling about their prospects. One of the interesting outcomes of that research was our ranking of the issues most likely to keep owners up at night.
Take a look:
Making enough money is the #3 worry, and attracting customers is #1. These issues are obviously linked, and as we’ve already established, owners get a raise only when company profits improve.
It makes sense that small business owners spend a lot of time thinking and worrying about their revenue. For large companies, a dip in sales might be a temporary annoyance or a reason for a modest selloff of publicly-traded stock. For a small company, a sales slowdown is a potentially business-ending threat.
How to get more revenue
In our national merchant survey this fall, we asked owners what they plan to do in the next 12 months to mitigate against threats. By far, the top response (77%) was saving more money:
That’s the right intention, but how are merchant supposed to save more when they’re already squeezed so tight? The clear answer is finding better and more efficient ways to generate more revenue.
We recognize that time is as limited as money, so we’re constantly looking for ways to help small businesses attract and retain more customers with less time and effort. Here are a few ways Womply can help out:
- Use our new automatic email marketing engine, Womply Customer Engagement, to get more customers to come back.
- Use Womply Reputation Defense to save time reading and responding to all your online reviews so more customers can find your business in local searches.
- Use our Get Reviews tool to encourage happy customers to write about their experience on Yelp, Google, and other popular sites. A one-star rating bump could mean 39% more revenue!