How Defining Numbers Can Drive Profit
I am surprised by the number of small business owners and solopreneurs that cannot tell me what their annual revenue goals are. This number is critical because it sets the parameters for all your other planning.
Let’s look at an example of how you can use this number to plan out your year for success:
Joe owns a service company–he knows his overhead and taxes are 40% of gross revenue. He also knows he needs to net $7,000 per month to pay his bills and maintain his current lifestyle. So he starts with $7,000 x 12 and then multiplies that by 140% (this equals $117,600 so he rounds that number up to $120,000). Joe now knows he needs to have a gross revenue of $120,000 this year.
But this number is just the starting point. For simplicity reasons, we will assume that Joe’s business is steady throughout the year. In other words – he does not have seasonal ups and downs. So Joe’s next planning step is to divide his gross revenue by 12 (months). Joe determines he needs to have gross revenue each month of $10,000. His picture is becoming clearer.
The next thing Joe needs to know is what his average sale/service job is. Looking at his numbers Joe sees that his average sale is $500.00. Now Joe can divide his $10,000 figure by $500.00 and he gets 20. Joe needs to average 20 customers per month to reach his gross revenue figure of $10,000.
NOTE: if you operate in billable hours the principles are the same -how many billable hours do you need to reach your target.
Joe’s next step is to figure out his conversion rate for prospective clients. How many potential clients turn in to actual clients. Again to keep things simple lets say Joe’s conversion rate is 50% (a good number). Now if Joe knows he needs 20 customers and his conversion rate is 50% he can figure how many prospects he needs to see on a monthly basis. In this case Joe needs to see 40 potential clients to close 20.
Now that Joe knows the above information he can track his business progress more effectively. Is he closing 20 customers a month? If not what is the problem? Is he seeing 40 potential clients? Where is he getting the majority of his prospects? Can he increase that? Does he need to increase that?
The answer to these questions will help you put your business into high performance mode. In my next post we will begin to look deeper into these.