Warning - some tough love ahead.
If you tell yourself you're not good with numbers you'll never succeed in business.
You were savvy enough to start your enterprise, you are savvy enough to follow what I'm about to share AND implement it in your own business.
I am most often quoted as saying, "What we measure matters."
Though, many business owners tell me they don't know the matters to measure.
They look at top and bottom line numbers if the bottom is "in the red" - they know things aren't working but not at what to do to get to black. If they want to influence the top number they don't know all the ways that could be done outside of "closing" more deals.
Today I want to share with you one of the things my private clients and I survey to evaluate levels of their business to determine where the systems and processes are supporting or sabbotaging their success, and then create strategies to streamline, leverage and scale their business to its full potential. Making and keeping MORE profit.
Candidly, this is not "easy". It comes with more challenges than we have time for here, AND is incredibly rewarding.
When clients increase their top and bottom line revenue numbers by 20, 30, 40, 50 percent or more I can't help but celebrate their commitment to their success and willingess to stand in the "weeds" while they made the incremental changes to get big results.
So, you are asking by now, "How do they do it?"
I walk them through a strategy, I learned years ago from an early coach and have used it with every team I’ve ever led, with my private clients and my own business as well.
It demonstrates how big results happen with small incremental changes.
Below are the 5 Factors you should be measuring and most likely are not.
Leads: How many people have contacted your business or who you have contacted--over the course of a year.
Conversion rate: The percentage of people who actually make a purchase. For example, if 10 people walk through a store and three people buy something, that store's conversion rate is three out of 10, or 30 percent, for that day.
Average value/dollars sale: The average dollar amount per sale, estimated over the course of a year. The average can range from $5 or $10 (for a small business or discount store) up to tens of thousands of dollars (for a bigger business such as a car dealership).
Average number of transactions: The number of purchases the average customer will make over the course of a year. Again, it can be an estimate. This number will probably be larger in a retail setting than in companies that operate in a professional services industry.
Profit margin: The profit percentage of each and every sale. Simply put, if a business sells something for $100, and profit was $25, the profit margin is 25 percent.
How does this relate to your top line revenue and bottom line profit? Follow the generic formula below to see how seemingly “small” shifts can have a big impact.
Remember, this formula multiplies factors instead of just adding them, so the cumulative impact is significant.
The Five Factors Formula
Leads x Conversion Rate = Customers
Customers x Avg. Value or Dollars/Sale x Number of Transactions/Year = Revenue
Revenue x Profit Margins = Profit
As an example, let's say your business had the the following numbers:
4,000 (leads) x 25% (your conversion rate) = 1000 Customers
1000 (customers) x $100 (Avg. Value or Sale) x 2 (Transactions) = $200,000 Revenue
$200,000 (revenue) x 25% (profit margin) = $50,000 Profit
What does this mean?
In the example above, you are running a business that converts one out of four prospects into paying customers. Those customers average two purchases at $100 per purchase each year and your company enjoys a 25 percent profit margin on revenues of $200,000.
It also means your total profit for the year is $50,000.
That’s nice…….so……what would happen if, over the course of the next year, you increased these results by just 10 percent in each of the five areas?
Let's do it, and then let's take a look at what happens to your bottom line:
4000 leads becomes 4400 leads
25% conversion becomes 27.5%
1000 customers become 1210 customers
$100 purchase becomes $110
2 transactions become 2.2
$200,000 revenue becomes $292,820
25% profit margin becomes 27.5%
Now plug the numbers we just grew above into the equation:
4,400 x 27.5% = 1210 Customers
1210 x $110 x 2.2 = $292,820 Revenue
$292,820 x 27.5% = $80,525.50 Profit
Examine the numbers closely and you'll see the 10 percent increase is incremental, which means you could easily nudge numbers up by that amount over a period of months--or even weeks.
The bottom line is that the new bottom line looks very interesting, don't you think?
Even though you've increased each factor by just 10 percent (including top-line revenue), we were able to boost bottom-line profit by more than 60 percent--a total of $30,525.50!
What could you do with an extra $30,000 in your business this year?
Think 10 percent is impressive? Do some math on your own and see what the numbers look like if you increase each factor by 30 percent, 50 percent or even 100 percent down the line.
The Five Factors aren’t mysterious business mumbo jumbo.
It's simply looking at your business in a different way and working with a set of numbers that exist in every company.
For now, work with your numbers and brainstorm:
ways to increase leads
get more customers coming back
increase the amount customers spend
and how to raise your profit margins
Debbie Page Whitlock is a business coach and leading authority on cash flow for women entrepreneurs, and writes on all things related to creating sustainable, scalable and potentially salable businesses and other useful bits of business wisdom she’s acquired on her 20 year entrepreneurial odyssey.