What You Need to Create a Sustainable Business

Updated: December 21, 2022

Starting a new business is not an easy task. But once it’s off the ground, you have to make sure the business stands the test of time. So now the question is, what does it really take to create a sustainable business?

A lot of people have great ideas.

But unfortunately, turning those great ideas into an actual sustainable business requires a lot of time and effort to have the operational and financial processes that will be the foundation on which it will operate.

So what’s the key? Let’s take a look.

Defining Your Market

Once you’ve developed your idea into a usable product or service, you need to find who will actually buy it from you.

It’s for this reason that one of the main aspects that will make your business sustainable is the number of people who are interested in what you have to offer. This group of potential customers is referred to as your market.

Understanding what motivates your market to make the decision to buy and how they interact with your business is an essential first step. Because you can literally have the best product or service, but if you can’t find the people who will give you their money in exchange for it, your business will be short-lived.

Users vs Customers

There are different business strategies that your business can follow to become sustainable. To find the right answer, you have to ask yourself: Is your business user-driven or customer-driven?

Users spend time on your platform. On the other hand, customers pay you for the products you sell.

This distinction can be confusing depending on your business structure. An example of this relationship is Facebook. Who are their paying customers?

Are they the people who scroll through posts?

Or are they the businesses paying Facebook money to get their ads in front of those using the platform?

Understanding the relationship between your users and your customers will help you develop the processes and strategies that will allow you to monetize consistently and maintain a sustainable business.

Delivering Value

What is the exchange of value between your customers and your company? Value comes down to two things:

• Money
• Time

Are your customers paying you money for a product you sell?

Are your customers/users spending time on your platform? (i.e. you’re capturing attention).

Either way, people only stick around if you offer them something of value.

Key point: Finding product/market fit is where your value aligns with your audience in a way they predictably come back to buy your product or service.

Doing a simple survey is not good enough. The crucial question is whether they’d part with their time or money for it!

Frequency of Transactions

There are several ways to make sure that a business is sustainable. One of them concerns how many times your customers will buy from you. This is will be product dependent, but in general terms, it’s more cost-effective to sell to your existing customers than to find new ones to convince and sell to.

How often do customers pay for your product/service? Is it recurring? Or is it one time? These are the questions that you need to ask yourself to make sure that you can strategize properly.

Recurring customers, even though not strictly necessary, do give you an advantage since you’ll be able to predict their buying patterns. This will give you the ability to have more accurate business planning and measure the positive impact of each new customer.

If it’s not recurring, you’ll need a really strong understanding of marketing and conversion metrics to create predictability in your revenue.

Sales Flywheel

How do you get customers to keep buying from you? One-time transactions aren’t bad but you have to create a system that encourages people to keep buying. This can be very lucrative.

Do you want to know about a company that absolutely hits this one out of the ballpark?

Look no further than the medicine cabinet with Gillette Razors and razor blades.

They practically give the razor handles away. That’s one-time revenue and maybe even sold at a loss. But they have recurring revenue because you must buy razor blades to fit the razor handle. So…

• Razor = one-time revenue
• Razor blades = recurring revenue

Increase Sales

Understanding how much you have to sell in order to stay profitable is key to having consistent financial performance.

How can you increase sales? Is your product something that is volume-driven or price-driven?

Every company must make a choice to make sure that they have a sustainable business model:

• Do we sell more = increase volume?

OR

• Do we charge more  = increase prices?

Managing Operational Costs

Managing your operational costs is one of the elements that will directly impact your sustainability. This is because there isn’t always a linear relationship between the cost to manufacture a product and the manufacturing volume. You may find that by increasing your production, your cost per unit may decrease. Or it can be the opposite. Whatever the case, being able to understand this dynamic will inform your business decisions.

• Software Startups? It’s the initial cost of building the product.
• Services Businesses? It’s the people (i.e.payroll) that deliver service.
• eCommerce businesses? It’s the cost of goods sold/inventory.

Knowing your costs well helps you find the proper margin so you can grow sustainably.

Revenue is an important metric, but you can’t let your costs get out of control!

Revenue vs. Cash Flow

When do you book revenue in your company? When do you collect cash from your customers?

Oops. Did you think we accidentally repeated ourselves? These two events are not the same thing.

Cash is real money you can use in your business. Making money on paper doesn’t necessarily translate to cash flow.

This is true for two key reasons:

• Because revenue is not revenue until you’ve collected the cash
• Because revenue has associated costs, and the true cash generated is a wholly different metric

You need a good handle on both metrics, revenue, and cash flow, to build a solid business.

How to Add Customers

How do you get a new customer?

Regardless of how great your idea is, you need to keep adding customers because some customers may leave or stop buying.

To get new customers, you may need to invest in:

• A sales team
• A customer support team
• A marketing team

If any of these are underfunded or non-existent, you’ll lose more customers than you earn, which leads to our next point.

Customer Churn

How many customers will stop buying your service or product every year?

You need to know this. The number of new customers you add every year needs to make up for the customers you lose and then some.

Unless you grow your customer base, you won’t be able to reach your sustainability goals.

Cost of Acquisition

How much money do you need to spend to get a new customer? In order to have a sustainable business model, your revenue per customer should be higher than your cost of acquisition.

So, if you’re spending $10 in sales and marketing to acquire a customer, they need to buy something from you worth more than $10. If not, you’re losing money on each customer.

There’s something to be said about lifetime value, but that takes time. Treading water while you increase lifetime value is not sustainable.

Variable Costs vs Fixed Costs

Not all costs are created equal. Knowing this gives you the power to influence costs and improve profitability.

Variable costs fluctuate based on how much product you sell.

These are things like:

• Cost of goods sold
• Commissions
• Shipping

Alternatively, fixed costs are incurred regardless of how much product you sell.

These are things like:

• Rent
• Payroll
• Utilities

Gross Margin

Your gross margin is how much money you make after you pay the cost to make or deliver your product. It takes into account costs that go up as you sell more of your product i.e. variable costs.

For example, in an eCommerce business, gross margin is calculated as:

Revenue – cost of goods sold = gross margin.

As stated above, revenue is often the focal point for all business owners. But you’ll have to go deeper and understand what happens to that revenue, and how it converts into cash flow. The first starting point to achieve business success is a deep understanding of your gross margin.

Unit Economics

Every good business owner knows how much gross margin or profit they make by selling a single unit of their product.

They understand the revenue per unit and they know the cost per unit.

At the end of the day, if you don’t know this about your product on a per unit basis, your business won’t survive for long.

Want Help Building a Sustainable Business?

Great ideas happen all the time. But without a solid plan, that idea never becomes a thriving business. Answering the above questions for yourself will get you on track to building a sustainable business.

Too often we think of accounting and finance as a boring list of numbers and rules. In reality, it’s more like a story. Your business is a complex story with all these data points weaving together to make everything work.

But just because it’s a lot of numbers, doesn’t mean it has to be complicated. By knowing your numbers and tracking them, you’ll understand your business and make it truly sustainable.

A good accountant, like Vertical CPA, can help you ask the right questions and uncover insights hidden in your numbers, so you can make the best decisions. Let us help you. Contact us today.