We've all heard entrepreneurs talking about building a profitable business model being the holy grail to success. But how do you know if you are on the right tracks with your business? Here are four signs indicating your business is on the right path.

1. Enough fat in your profits for management

When starting a business, you're often the sole operator handling everything from sales to bookkeeping. However, as your business grows, you need to factor in the cost of management. For every four to five employees, you'll need someone dedicated to managing the team and handling coordination tasks. For instance, in a property maintenance business, you may start with one van and one person, but once you expand to four or five vans, you'll need someone in the office to manage schedules, answer calls, and perform administrative tasks. Ensure your profit margins are sufficient to cover these management costs, which are vital for sustaining growth without becoming a headache

2. Repeatability

A business model that relies on repeatable products or services is less risky and more scalable. If your business provides completely bespoke services to each customer, every new quote comes with the risk of underestimating time and costs. Instead, aim for a standardised product or service with minimal customisation. This approach not only reduces risks but also lowers setup costs and learning curves. For example, offering a standard package with a few customisable options can streamline operations and enhance profitability.

3. Your fixed costs are covered by recurring spend

A highly profitable business model often includes recurring revenue or a base of repeat customers. You ideally want this to cover your fixed costs every month so you know that worst case scenario, you will break even. While some businesses, like supermarkets, can't tie customers into contracts, they still rely on regular repeat business. By analysing customer data, you can estimate the proportion of repeat customers. If, for instance, 50% of your customers consistently return and their spending covers your overhead costs, you've got a strong foundation for scaling. This recurring revenue ensures stability and predictability, crucial for long-term growth.

4. Payment for being an MD and shareholder

As a business owner, you wear two hats: managing director and shareholder. You should earn a fair salary for your work as an MD, and receive a return on your investment. This dual compensation structure not only secures your livelihood but also makes your business more attractive to potential investors or buyers. Ensuring sufficient profit for reinvestment or shareholder returns is key to sustainable growth.

Conclusion

These four signs indicate a profitable and scalable business model. Assess your business against these criteria to gauge its readiness for growth. By doing so, you can invest confidently, knowing your business is built on a solid foundation.

Let us know your thoughts in the comments. What challenges is your business facing in scaling?