Profitability Explained: 5 Reasons Businesses Fall Short Reaching Their Earnings Goals (and How to Fix Them!)

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Profitability Explained: 5 Reasons Businesses Fall Short Reaching Their Earnings Goals (and How to Fix Them!)

What does profitability and "meeting your income goals" mean to you? It might not involve a private jet, but most people have a dream of what their profit paradise looks like...

Imagine the sun is shining, there’s room service, and your business is providing you with your dream lifestyle or impact…

who wouldn’t love to achieve that dream!

Unfortunately, their profit dream is not the reality for the incredible 88% of small business owners who are still paying themselves less than they’d earn in a job working for someone else. (Or the 26% who aren't paying themselves at all)

There are so many moving parts which affect profitability. So, it often feels hard, lonely, or like you need an MBA to improve your profits and achieve your income dreams. 

The good news is, there are processes you can follow to diagnose why your profit realities are not matching your goals.

There are five common culprits behind why small businesses aren’t making as much profit as they desire. This article explains these problems in detail and helps you identify which profitability problem(s) you have.

But more importantly, it spells out what you can do to overcome them, so that you can finally take flight.

Let’s get started…

Please note that this guide is not personalised financial advice. Always have a trusted expert advisor look over your data before using it to make any important decisions.

Profitability Problem 1: The numbers aren’t set up to be profitable at a foundational level

One of the most common myths in business is that more sales = more profit. 

But, for this equation to be true, the numbers have to be set up correctly.  This ensures that the business is profitable enough per sale for it to be scalable.

Otherwise what happens is that the more sales a business makes, the more the business owners just run themselves ragged. But, they STILL don’t make enough profit to comfortably cover all the business expenses and pay themselves a fair wage.

Think of profit like the fuel for your business’s plane engine. No one can fly very far with the fuel light on! So, it’s time to fill up your fuel tank to avoid running out of profits mid-flight, or having to make an emergency landing.

What causes lack of profitability?

Most businesses take a while to become profitable in the beginning as they grow their brand identity, reputation and awareness. But, unfortunately it’s very common for small business owners to start a business without really understanding the basic numbers they need for their business to become profitable over time. This is ultimately the root of the problem.

Many people are scared or overwhelmed by the numbers, or feel like they’re not “good with the numbers”. This often leads them to avoid looking or thinking about their basic business profitability. Sometimes it seems easier to focus on the branding, sales and marketing, because these feel more fun and easy.

Unfortunately, no amount of sales and marketing is going to fix an un-profitable (and therefore unsustainable) business model. So, it’s common for me to work with brands that are beautiful, appealing to customers, and sell a lot, but still not making the money they want or need to make. 

Often when this profitability problem resonates with people, they feel like an imposter in their business. It can look bright and shiny from the outside, but not be giving them the profits people assume it would be. So they feel lonely and secretly ashamed.

But, there’s no need to be ashamed because this problem is far more common than you think! 

Especially as entrepreneurs are often known for their courage and creativity, not necessarily for their accounting expertise.

How do you identify if your business has a foundational profitability problem?

There are some key metrics that identify whether the business can be profitable or not:

  1. Your total revenue -
    This is how much money you’ve made in a period of time. Your bookkeeping or sales systems should hopefully show you this metric very easily.
  2. Total cost of sales -
    This is how much the variable costs in your business are, which would grow as your sales grow. Such as your materials, any labour involved in the manufacturing or delivery of the product/service, freight and transaction costs etc.

    If you’re unsure what your cost of sales are for each of your products or services, I have pricing calculators which will help you work this out in my Profit Formula Course or Flight Club program.
  3. Your profit margin -
    This is your (total sales - cost of sales*) / total sales x 100 *=otherwise known as your gross profit.

    The same pricing calculators I talked about above, will also help you work out your gross margin.
  4. Your total fixed expenses -
    These are overheads which don’t grow as your sales grow. Such as your subscription costs, rent, power, internet etc. Every business should have a budget to track their fixed expenses.

    Grab my budget template from only $17 here to save time creating yours

Your profit per sale is one of the most useful metrics you’ll ever work out for your business.

It helps you identify three extremely critical things:
  1. Whether your margins are enough to cover your expenses and make enough profit to grow. 
  2. How many sales you’ll need to achieve, to remain profitable and meet your income goals.
  3. Whether that required number of sales is realistic for your business, given your capacity and the size of your market.

How do you fix a foundational profitability problem?

I’ll rip the Band-Aid off by sharing the bad news first:
Which is that some businesses won’t ever be able to sustain themselves by making enough profit, with their current model. 

Common reasons that a business can’t make enough profit to sustain itself are:

  1. The cost of sales (particularly materials and labour) are high. This doesn't leave enough margin to cover all the other expenses the business has.
  2. They have inflated fixed expenses to cover.
  3. The market simply isn’t big enough to sustain the number of sales the business would need. 
But, the good news is that if the numbers aren’t looking profitable, knowledge is power and it’s worth knowing this now before things get desperate and result in a crash landing!

What could you change to make your business more profitable?

There are lots of opportunities to tweak your key numbers and improve your business’s viability.
These include:
  1. Putting up your prices, or reducing your cost of sales (cost of materials and labour). Both of theses will improve your gross margin to make more profit from each sale.
  2. Reducing your fixed expenses.
  3. Improving your average transaction value (which is how much people spend with you per sale).
  4. If your gross margin is healthy, you can focus selling more. Then the increase in sales can cover your fixed expenses.

Where can I go for help with this?

You can try your accountant. But, unfortunately, some accountants aren’t proactive (or skilled) in helping with these improvements. Especially if the business owner has only contracted them to help with tax and reporting. And it can be difficult to navigate by yourself! 

If you want some more help auditing and improving your foundational profit numbers there are several ways I can help. I have options for all price points.
Check them all out here.

Word of warning: don’t move on until you’re certain you don’t have a foundational profitability problem...

If numbers scare you, it can be tempting to skip ahead because solving this feels overwhelming.

But, my advice is: it’s really not worth investigating if you have profit problems 2-5 until you've ruled out having a foundational profitability problem.

It’s possible for a business to have more than one of these problems. But, everything else hinges on this problem, and that’s why a foundational profitability problem should always be solved first.

Profitability Problem 2: The sales system isn’t optimised to convert (or there isn’t a sales system in place)

Once a business is profitable at a foundational level, many small business owners still find their sales results disappointing. That’s when it’s time to check for a conversion problem. Then, refine your sales system for optimal success.

What is your sales system and why is it important to your profitability?


Sales System
Your sales system is how your business is set up to attract new leads, convert them into customers and nurture them into raving fans.

Think of it as the engine for your plane. You can’t fuel up a plane that doesn’t have an engine, or whose fuel tank isn’t connected up properly!
Some businesses will require an engine/fuel tank to be installed in their business. Some might have all the different elements they need to fly, they just need them connected so the fuel flows to the engine…

What should your sales system look like?

There are 6 elements to your sales system that you need to consider, and optimise for it to become what I call a “Sell without Selling System”. (In other words a system that does the majority of the selling for you. Then you or your team don’t have to feel like you’re constantly hustling to close sales.)

These are:

Your marketing channels -

These are what drives awareness about your business, and adds fuel to your sales engine. Such as social media, networking, print advertising or paid advertising.

Your trust bridge -

Money is the exchange of trust. So, your trust bridge is the free content that you release to help people understand that you not only can solve their problems, but they can trust you to solve their problems. So that they are prepared to buy or work with you.

Your conversion method -

This is your system for closing the sale. There are lots of different conversion methods depending on the type of business. But for you it might look like a proposal, online checkout system, in-person shopping checkout, or even a conversation.

Your first offer -

This is the first thing people buy off your business. This is important because it sets the tone for whether they have a great experience and return, or disappear never to be seen again.

Your customer nurture system -

How you follow up and nurture your customers after they’ve purchased from you is considered your customer nurture system. I reckon this is the most undervalued part of a sales system!  It helps set you apart from your competitors, develop lasting relationships with your customers, improves your repeat customer rate, and most importantly has the power to turn your regular profits into jet engine fuel to fly much further and faster on a tank.

Your desired result -

In a perfect world, which product/service would you desire to sell the most of? This is your desired result. It’s usually your signature product, most profitable product, most impactful product, or most expensive product, depending on your own business model and goals.

Your entire sales system should be designed around leading people to this result. So, you want to plan this first and work backwards…

Additional resources:

Check out my article on Customer Pathways here, my free one-hour sales class with workbook here, my Sell without ‘Selling’ course here, or my signature Flight Club program here for more information on turning your customer pathway into a 'Sell without Selling' System.

These all teach my system for optimising your sales system for best results. Simply select the best option for you based on your budget and how much personalised help you’d like.

How do you identify if your business has a problem with its sales system?

Sometimes, after learning about what a sales system is, a business owner will just intuitively know that their system needs work. (Usually this is the case when there is something from the list above obviously missing from their business). But, the rest of the time, our numbers can tell us what is and isn’t working well.

The most important sales metric to measure:

There is one main number which will tell you immediately if you have a sales problem or not. This is your conversion rate:


Conversion Rate
Your conversion rate tells you: for every hundred people who visit your website (or enquire with your business), how many of them convert into customers?

What is a normal/good sales conversion rate?

The average conversion rate for most industries is between 1-2%. This means most businesses need 100 people to visit to make 1-2 sales.
If you have an ineffective conversion rate, then that indicates a poorly set up sales system. 

It doesn’t matter how much fuel you add to an engine, if the hoses are leaky or disconnected, all that valuable fuel is just going to end up on your shoes.

In other words - it’s a total waste of time and money to spread awareness for a business with the goal of increasing sales, if people won’t convert when it comes down to it.

If your conversion rate is under 1%, 

It means your business either doesn’t have enough traffic/data to have got enough results yet. Or, that you have a conversion problem affecting your profitability. I recommend fixing this as a priority. Especially before paying for any ads!

A 1-2% conversion rate means that:

Your results are average, and for most businesses this indicates an adequate* result. Improving your conversion rate here will still be beneficial, but isn’t likely preventing you from achieving your sales goal.
(*Note I used the word ‘adequate’ here, rather than ‘best possible’)

A conversion rate over 2%:

Is highly desirable and rules out any major problems with business’s ability to convert sales. (But I encourage you to still keep reading this section for two other important sales system health indicators).

What tangible difference does it make to your sales if you can improve your conversion rate?

To illustrate how important your conversion rate is to your business, I thought I’d quickly show the real difference in sales it can make...

Let’s say your business sells t-shirts for $50:

If you have 2000 people visit your website, then,

  • With a conversion rate of 1% you’ll sell 20 t-shirts and make $1,000 in sales.

  • At 2% you’ll sell 40 t-shirts and make $2,000 in sales

  • At 3.5% you’ll sell 70 t-shirts and make $3,500

I think we can all agree that it would be nicer to achieve the 70 sales, over the 20 sales, for the same amount of website visitors!
When we are paying for visitors to our business, these numbers become even more impactful. For example:

If you have to pay 50 cents per visit to your website, the difference in conversion rate is the difference between paying

  •  $1,000 in ad spend and losing money (by the time you paid for your advertising, cost of sales and fixed expenses).
  • Or making $2,500 in initial profit.

These two scenarios illustrate a very big difference in the business’s scalability potential!

How do I work out my conversion rate?

If you have your Google Analytics set up correctly, hopefully it will tell you what your conversion rate is. Or, your online shopping cart system should.

But, you can work out your conversion rate manually by going:

(Number of people who purchase / number of website visitors (or enquiries, or in-person shop visitors depending on your type of business)) x 100

What other metrics are helpful to measure, to show if your sales system is fully set up for success?

There are two very valuable profit-markers to track and measure, to show if your sales system is reaching its profit potential or not.

These are:

Your return customer rate

This magic metric indicates the health of your customer nurture systems, or remarketing systems because it tells you how many of your customers come back to buy from you again. It’s easier (and cheaper!) to sell to an existing customer again, than to find a new customer. So, you want to make this number as high as you can. Happy customers are also great at marketing your business to their friends and family for you. That's why it's an added bonus when you can develop raving fans.

Your customer purchase frequency

This is how many times a year (or over their lifetime) a customer purchases from you. This number helps you work out how much each customer is worth. You can also use it to estimate how much profit you make from them (on average). This is a helpful for working out how much is viable to spend on advertising to acquire a new customer.

What factors influence a poor conversion rate?

Just like our basic profitability, there are also quite a few moving parts that affect profitability of our sales system, and conversion rate.

These include:

Your brand value -

People have to know, like, trust and value your brand, in order to want to work with you. Ensure your brand identity communicates your value, values, authority and credibility to your dream customers.

My course: The Brand Identity Project can help you solidify your brand identity to attract the right people to your business, if you need help with this.

How you package, and the quality, of your products and services -

It’s important to make sure that there is a match between the quality and price point of your solutions, the market, and the people you are trying to help. If there is a mismatch between any one of these, then this will affect your conversion rate.

Your communication / messaging -

How you communicate how you can help people, greatly affects your results, because words sell… So, you must make sure that you speak the language of your customers to make sure there isn’t a disconnect between what they’re searching for and what you’re offering. 

This includes across all of your marketing channels. Such as your website, social media channels, printed materials, signage, search engine keywords, product/service names and so on.

How to improve your sales system, to sell more, more effortlessly?

It can be really difficult to identify what’s working well in a business and what isn’t, ourselves, because we all get so close to our own businesses. This is where it can be very beneficial to get feedback from other people. Good candidates for feedback include your customers, biz besties, or a business professional who specialises in this area.

It is amazing what another set, or few sets, of eyes can help identify about how your sales system, messaging and business is experienced by other people! This is why my website and marketing audit sessions are some of the most popular workshops I hold for my clients and students.

The Helpful Academy has lots of resources for helping you improve your sales system, depending on what needs improvement: 

The best place to start is probably my free Sales Class which explains my signature process for helping you ‘Sell without Selling’. Or, contact us for help to identify the best option for your business.

Profitability Problem 3: There isn’t enough traffic coming into the sales system, for it to be generating enough sales

Once you’ve ruled out profit problems 1 and 2 in your business, so you know:

  1. Your business is able to make a profit per sale

  2. Your sales conversion rate is adequate and your sales system is set up and optimised for selling

It’s time to rule out Profit Problem 3 and see if you have a traffic problem…

What is a traffic problem and why is it important to your profitability?


Traffic problem
A traffic problem is, not enough people finding out about your business and visiting your website (or enquiring).

In other words, it’s a marketing problem.

If we go back to our engine analogy for a minute, it would be like having a clean, well-oiled engine, but not putting any fuel in it. Just like problem 1 - no one travels very far on an empty tank.

You can have the best products, services and sales system in the world, but you still simply can’t sell a secret!

How do you identify if your business has a traffic problem affecting its profitability? 

Just like in the other problems I’ve shared, we can find out if we have this obstacle in our business by looking at our numbers.

The numbers that are most useful to help us work out if our business has a traffic problem are:

  1. The number of visitors to our website

  2. The reach, impressions, engagement and click through rates from our social media advertising

  3. The number of email or phone enquiries we receive

  4. I also like to look at the list size, open rate and click through rate of a businesses email marketing.

How do I find these numbers?

This is where an analytics tool such as Google Data Studio, or Reportz really comes in handy, to save you time and effort looking in a bunch of different places.

But, you can also work this out manually (preferably by delegating it to a team member) by looking in:

You’ll need a place to record your data so that you can analyse it over time and look for trends. 

I supply all of my clients with an In-Flight Dashboard® that they can complete monthly and share with me for insight. But, you can get away with a simple Google or Excel Sheet as long as you’re recording the data you’re collecting.

How much traffic does our business need to generate to achieve its sales goals? 

This is really the most important question! Because once you know your conversion rate, and have set a sales goal, you can use a traffic calculator to predict how much traffic you will need, to achieve your goals. 

You can also use an ad spend calculator to answer the question, “if I decide to pay for that traffic, how much ad spend would I need, to achieve my goals.” 

I have both of those calculators available inside my signature program Flight Club but at this time they are not available separately.

How do you fix a traffic problem?

If you need more traffic in your business, this means you need to invest in your marketing system to build awareness of your business.

At The Helpful Academy we have an abundance of both free and paid resources to help:

The main thing is to work out what is/isn’t working well, so you know what to prioritise.

If you’d like some personalised recommendations, reach out here and we can help you identify opportunities for improvement, so that you can create truly magnetic marketing.

Word of advice:

I always recommend avoiding hiring a digital marketing agency until you know all your profit markers I’ve talked about in this section. Because you need to be extremely clear on what your budget is for attracting new customers. Not to mention your sales goals for any marketing campaigns.

Otherwise you risk spending thousands of dollars of cash and still not experiencing the results you’re looking for!

Profitability Problem 4: The business has reached the capacity of how many sales it can deliver

There comes a time in every business, where they’ll hit a sales ceiling and won’t have the capacity to deliver any more sales. 

If the number of sales they’re achieving is enough to satisfy their goals, then the business doesn’t have a capacity problem. But, when they still desire more growth, this is considered a capacity problem.

Many of the questions I had to answer in the other profit problems are redundant here, because a business with a capacity problem will *know* that they have a capacity problem!

How does a capacity problem show up?

A business most likely has a capacity problem when the business owner and team are stretched to deliver the sales they already have going on, and the thought of more sales scares, worries or overwhelms them rather than excites them.

If we go back to our plane engine analogy, a capacity ceiling is like wanting to fly from New Zealand to London, but only having a fuel tank big enough to fly you to get to Australia…

No amount of dreaming or planning will overcome the limiting size of your fuel tank! If you want to fly further, faster, you’ll simply need to invest in more resources than you currently have...

How do you fix a capacity problem?

There are two ways a business can expand its resources to overcome a capacity issue:

  1. Hire more people to your crew

  2. Improve your systems and efficiency

What types of experts can guide you in overcoming a capacity problem?

The level of complexity involved at this level of business means that it’s highly beneficial (and much more efficient*) to hire some expert help.

*At this stage in business it's especially important to outsource as much as you can.

A Business Coach or Management Accountant -

Look for one who specialises in helping you look for opportunities for refinement. Make sure they're experienced in advising you how to make sure any new initiatives remain profitable.

HR and/or Recruitment Experts -

Are helpful to source new staff and manage your increase in team capacity.

A Property Broker -

If you need to invest in greater efficiency or deliverability, you might want to source a larger premises. This is where a Property Broker can help.

An IT or Systems professional -

Can help you source and install systems and apps to help automate and improve your efficiency

Word of warning:

You want to make sure you’re very careful here! Because if not done well, investing in team and systems growth can thrust you back to having a foundational profitability problem. 

If we remember back to the formula; more sales = more profits, this needs to stay true for you when investing in business growth.

Profitability Problem 5: The market is not big enough to support the level of sales the business needs to meet its goal

I don’t come across this problem in my work as commonly as the other 4 problems. But, some businesses find that their required number of sales is unachievable given the size of their market.

How do you identify if you’ll have a market size problem?

This is where your market research becomes incredibly important. Look for how big the industry is in your location. Or how much demand there is for your type of products and services.

I don’t specialise in this area, so I don’t have any tools or resources to make this easier for you. But a quick Google search for your industry should hopefully help you with some data, or look for a business coach who specialises in this.

How can you overcome a market size problem? 

Here are two ideas to get you started:

Expand your market -

Is it possible for you to sell outside your initial area, or into another country? This will expand the size of your market. Be careful to run the numbers before any market expansion to ensure it's a profitable option for you.

Introduce some other product/service to your range -

Selling more of your products is only one option for improving your sales. One of my favourite options for improving profits is to improve sales to your existing customers by diversifying your offerings.

So, consider: 
  • What are some complementary products or services that your customers would also find interesting?
  • What would it look like (aka take to be profitable) if you introduced these to your range?

In Summary

Most business owners get frustrated with their profitability and sales (or lack of) at some point or other. It can feel very overwhelming and difficult to try to diagnose what the problem is yourself.

But, there are five main profitability culprits:

  1. Foundational profit problems
  2. Sales conversion problems
  3. Traffic problems
  4. Capacity problems
  5. Market-size problems

Figuring out which one(s) of these issues is preventing your business from making it to your desired profit destination doesn’t have to involve qualifying for an MBA!

There are key metrics you can look for which will help you diagnose the problem, then proven processes you can take to turn things around.

If you’re ready to get your plane off the tarmac and take flight, we have a variety of ways we can help you improve your profitability, sales and marketing:

  1. If you find yourself without any budget for support, start with my free profit classfree sales class, or our many free e-books, checklists and workbooks.
  2. If you have some support budget and you’re ok to DIY, explore our affordable templates or courses.
  3. If time is your biggest obstacle, or you thrive best with personalised accountability and support, contact us about our signature Flight Club program or other services.

All the best with your journey to reaching your own unique profit-paradise!

I hope that this article has been helpful in giving you some tangible things you can do to improve your results.


About the author:

Kat Soper is the Founder and Head Trainer of The Helpful Academy Online Business School.

Kat is passionate about helping start-ups and small businesses succeed and achieve their business goals so that they can achieve the lifestyle they desire (and deserve).

If you’d like individualised help with growing your business, check out our services.


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Detect untapped potential in your business with my signature In-Flight Profit Audit®

There are so many moving parts affecting your profitability and sales. So, it often feels hard like you need an MBA just to figure out what's not working and where the quickest wins are. But detecting any under-developed or utilised potential in your business just got easier!

Much like a skilled pilot detecting the best flight path, our unique In-Flight Audit® acts as a profit detective, guiding you towards the most efficient path to achieve your business goals.

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