How to Grow Your Services Business in Economic Uncertainty
There are many reasons we’ve dubbed 2020 the “Year of the Customer” here at StartLightSoft, and we feel like these reasons particularly important for service-based companies in America. In recent years, there’s been a boom of boutique firms providing specialized services. By narrowing in on a niche skillset, these firms have been able to break away from their, traditionally, much larger competitors and offer something new.
And while business has been generally good, service businesses are on edge. 2020 brings a lot of uncertainty. On the highest levels, events like the U.S. election and Brexit bring plenty of economic anxiety. More immediately, the coronavirus outbreak has taken a big hit on the economy and could continue to have a major impact on business. When buyers feel nervous about the economy, they might begin to bring some work in-house, rather than continue to pay a premium for outside expertise.
Economic Anxiety & Client Choice
A mix of economic uncertainty and expanded client choice thanks to globalization is what makes focusing on excellent service the name of the game in 2020. In a time when so much is in flux and the world seems to be holding its breath, serving your customers is one of the few things you can control.
Of course, excellent customer service doesn’t make your business recession-proof. While you focus on how you’ll give your customers an unmatched experience, there are some tactical things you can do within your business to make it more agile, able to roll with the punches. The key to growing business this year lies in making sure your company is as nimble as possible and able to respond to industry or market changes quickly, as well as leaving customers with little choice but to stick by you — because your service is just that good.
A Nimble Business, Part 1: Keep Costs Low
When business is going well and revenue is going up, expenses usually go up, too. As they should. Running a bigger, more complex business means that you’ll need to spend more to keep it going.
That said, being happy with the bottom line can often blind businesses to overspending. Things are going well, so there’s no reason to get on someone for going over budget on Google ads this month. But if the goal is growth in an uncertain climate, keeping spending in check will be key. Here are our top tips to keep expenses low.
Keep an Eye on Fixed Costs & Variable Costs
There are two types of costs to keep an eye on going forward: fixed and variable costs. As a reminder, fixed costs are those that you’ll pay no matter how much you sell, like rent, salaries, or coffee beans for the staff kitchen.
Variable costs are those that change in proportion to sales. They’re associated with how much it costs to create and sell your core product or service. If you made greeting cards, paper would be an example of a variable cost. The more cards you sell, the more paper you use.
As you examine your costs, you’ll want to keep an eye on both — but in different ways. Variable costs can have a big effect on your business. If business booms along, finding ways to keep variable costs down means more money in your pocket after every single sale. If things start to drop off, you’ll wish you had the cushion of a bigger margin.
However, fixed costs are probably more important for a services business to monitor. Keeping your fixed costs down means that if business suddenly drops off, you aren’t on the hook for an exorbitant amount. You don’t need to run your business like a bare-bones operation, but you do want to make sure your fixed costs are manageable, even in slow months.
Find the Right Team Structure
If you’re thinking, Sure, but my overhead is pretty low, we hear you. The biggest cost service-oriented businesses have is often not raw materials. It’s labor. It’s the cost of your team’s expertise.
If payroll costs have you concerned, now is a great time to look over your team’s structure, in particular your mix of W-2 employees and contractors.
Employees vs. Contractors
Not sure what the difference is between employees and contractors? Here’s a quick trick. If someone checks off any of the following, they’re probably an employee:
- You (the employer) set the hours, not the worker.
- You decide where that person works (i.e. in the office).
- You can tell them what to focus on and when.
- You are responsible for providing all necessary equipment, like laptops.
If the opposite is true — meaning the worker can decide when, how, and where they work — they’re likely a contractor.
Why is all of this important? It’s important because the primary difference between the two is who’s on the hook for taxes.
With employees, you are responsible for withholding a portion of their income for taxes, in addition to paying payroll taxes. With contractors, the worker is responsible for paying taxes. When you add up payroll taxes and additional benefits you might offer, like health care and 401(k) plans, employees are a more expensive investment. And they’re an investment that’s absolutely worth making if you need someone dedicated to your company — and only your company.
But if staying agile and flexible is the goal, it’s worth evaluating whether or not some positions need to be on the payroll. Can you bring in more contractors to help you fulfill demand when you need help?
If your business expands and contracts often, bringing in the same stable of contractors when you need them will allow you to move more quickly than going through the hiring process for a full-time team employee. And it could save you some extra money during leaner periods.
Manage Your Team’s Expenses
Ever review your team’s expenses at the end of a month and wonder what happened? Staying on budget can be hard for teams, especially when certain expenses need to be mapped to specific clients. Luckily, there’s a fix for this problem.
What’s a Virtual Card?
Virtual cards got their start as a way to protect consumers when making purchases online. If a website was hacked and their card information was stolen, the hacker would only make off with the virtual card’s numbers, and they’d have no way to know the real card numbers associated with that account.
How Do Businesses Use Virtual Cards?
Virtual cards may have started to serve the everyday consumer, but business owners are adopting them for their own purposes. Virtual cards can be created on the spot for individual employees, clients, or vendors.
For example, one business might set up a virtual card for each ad campaign they run on Google or Facebook. Another might set up a virtual card to pay for all expenses related to a specific client. A third might do a mixture of the two strategies. Virtual cards allow for a lot of flexibility in how you manage spending.
Best of all, they make it ridiculously easy to track spending in real time. For example, if Patrice’s HR Consulting firm sets up a virtual card for each client, Patrice could easily keep an eye on her teams and make sure that no project is at risk of going over budget. If they are, she can do something about it then and there — rather than wait for an expense report at the end of the month.
Monitor Financial Reports Regularly
If 2020 has you feeling unsteady about your business finances, the hands-down most important thing to do is to get in a regular rhythm of reviewing your financial reports now. When it comes to analyzing the health of your business, there are no more powerful tools than your profit and loss statement and balance sheet.
Together, these reports help you understand how you did in the last accounting period and how your business stands overall.
Need a refresher on how to read your financial statements? We’ve put together a simple cheat sheet for reading P&L statements, balance sheets, and cash flow statements. Download it here.
Your financial statements yield countless metrics that you can slice, dice, and overanalyze for hours on end. Here are the metrics we think you’ll want to pay closest attention to.
To keep an eye on your short-term obligations, consult your current ratio. This ratio shows your ability to pay off current liabilities (or things you’ll need to pay off in the next year) using your current assets (things you could turn to cash within one year). It’s a strong measure of how liquid your company is and how quickly you can pay off short-term debts if push comes to shove.
We created a calculator to help you understand your current ratio. Check it out here.
Unlike current ratio, your cash runway is meant to give you a longer-term view of your finances, especially if you find yourself operating at a loss. The goal of this metric is to show you how long you could continue to operate before your cash stores run out.
You’ll hear this metric used most often with startups who are intentionally burning through their VC-backed cash as they invest in growth. But it’s also a healthy metric for any business that’s losing money to keep an eye on.
If your business is cyclical or feels economic downturns acutely, you’ll want to keep this metric in your back pocket.
Check out our burn rate calculator here for more information on your cash runway.
Other important metrics to keep an eye on might include EBITDA and days sales outstanding. Overall, it matters less that you monitor a few specific metrics with eagle-eyed intensity than it does that you feel comfortable reading your financial statements overall.
A Nimble Business, Part 2: Grow Your Revenue
If half of the equation is keeping costs down, the second half is about earning more revenue overall. Put together, you’ve got a recipe for success and stability, no matter what lies ahead. Piece of cake, right?
Clearly, if it were easy to just make more revenue, everyone would be doing it. But we’ve got ideas for you to try that will put you on the road to more revenue for your business.
Serve Your Current Customers More
Did you know that, on average, it costs businesses five times more to acquire a new customer than it does to sell to an existing one?
Bringing in brand new business isn’t cheap. So before you start thinking about your next marketing campaign, consider ways to deliver more to your existing customers. Are there opportunities to cross-sell or upsell them?
Equally important, make sure that your customer service is top-notch. It doesn’t take much for customers to look for an alternative if they’re not happy with the service you’re providing.
Your existing customers provide a wealth of opportunity to boost your revenue — without high customer acquisition costs or outsized efforts. It is the “Year of the Customer,” after all. So start with the people who know you and your business best.
Figure Out Your Differentiators
Busy business owners don’t always want to slow down to talk about something as abstract as branding, but knowing what makes your business stand out — and articulating it to potential customers — can go a long way toward boosting revenue.
Service companies face steep competition, and the field grows more crowded every year. Trends show that firms are moving away from general broad service offerings and becoming more niche. Do you know what your company’s specialty is? Is that clearly outlined on your website and in sales materials? If not, potential customers probably don’t know either, and they’ve got plenty of other companies to choose from.
On top of that, knowing your business differentiators means that you can market effectively to the right kind of client. Not all clients will be a good fit, but the more clearly you can explain what you do well, the more likely you are to connect with those that will.
Form Strategic Partnerships
There’s nothing like a steady drip of referral clients to help you boost revenue. As service businesses become more specialized, there becomes a greater opportunity to partner with firms that offer very different services than you do.
Strategic partnerships start with trust. So get to know people in your industry and look for opportunities where referrals can flow both ways. They need to trust that you’ll provide excellent work before they send any clients your way, but they’ll be even more incentivized if you send some work their way, too.
Stay Ahead of Changes in the Industry
At startups across America, the phrase “Evolve or Die” is displayed on stickers, tee-shirts, and mugs, serving as a message of inspiration to keep a watchful eye on changing circumstances in their industries. Any company that can’t keep up with a rapidly changing world risks falling by the wayside, which is why the average life of an S&P 500 company has dropped significantly in recent years.
The more connected the world becomes, the more service businesses will feel the pressure of global competition. New technology can enable better service to clients, from communicating with them more easily to delivering better analysis. But as technology improves, your clients may see opportunities to adopt a new solution instead of paying for your team’s labor.
The reasons why you need to stay up-to-date on technology, industry trends, and client demands are many. Chief among them is that rolling with the punches of a changing industry will allow you to serve your customers longer and to serve a greater number of customers overall.
So no matter what 2020 brings, we hope you’ll feel confident to rise above any changes it brings and find ways to grow your business. We’re rooting for you.