Numbers You Should Watch
Written by CMG News Contributor, Doug Carleton
Your financial statements – income statement, balance sheet, statement of cash flows, and retained earnings statement are only snapshots and are current for one day only. Then it all becomes a history of past performance. They don’t show where you are going and how you are going to get there. As part of the whole process of getting there, here are a few numbers that should be part of your overall plan.
COST OF CUSTOMER ACQUISITION
You have a marketing budget. The cost of acquiring a customer tells you how many customers you can expect to acquire as a result of your marketing expenditures. It allows you to predict revenues based on your budget. It can also help determine which marketing channels are most effective.
Suppose you spent $5,000 and acquired 50 customers. Your cost of acquiring a customer would be $100. Obviously you want customers to become repeat customers so that your per-customer cost begins to go down. The important point is that you can make a projection of revenues and focus on the marketing channels that are generating the most customers.
SALES CYCLE LENGTH
How long does it take to close a sale? A retail store closes a sale in minutes. A room addition on a house may take months to close, and even though the sale closes, cash does not start to come in immediately. So it is critical to understand your sales cycle in order to project as accurately as possible how much cash you will need to get through the cycle until the checks start coming in.
SALES CONVERSION RATE
How many sales are converted the first time a customer visits your physical or online business? Suppose you have a monthly operating budget for your company of $42,000. If 100 people come into your place of business and 30 make a purchase you have a 30% conversion rate. If those 30 sales generated $1,500 each day for 28 days you will have hit $42,000 in revenues. So that tells you that you have to generate 100 leads per month to break even which can help you make the most of your marketing budget to help generate more leads.
Now we circle back around to the ever-important topic of cash flow. Burn rate is usually talked about in venture capital financing but it is just as applicable to every day businesses. If you are spending more money each month than you are bringing in how much cash are you burning through each month? How long will the cash you have last before it either runs out or you start to break even? The more tools you can employ in order to keep your burn rate to a minimum before it burns down the house, the better your chances of being there when the economy really starts to improve and some of that cash people have been saving starts to get spent. You want them to spend it with you and you want to be there to sell to them.
This blog entry is a slightly edited excerpt from Doug Carleton's 'The Daily Life Of A Small Business Owner' series. Doug was a mentor with SCORE, Startup Virginia, and Lighthouse Labs, and has 25+ years of experience in small business finance including 12 years in SBA lending. To contact Doug directly, please email him at firstname.lastname@example.org.