As a Virtual CFO, I work with businesses on what I like to call the Awesome 8. In this post I’ll be talking about Growth. I have decided to put together individual blogs for each of these 8 key areas so make sure you check them all out as they are released because I’m sharing with you exactly why each area is super important and how you can go about improving each one in your business.
So let’s get into it. By growth, I am referring specifically to increasing the turnover or revenue of the business. Almost every business owner wants to increase their turnover but very few understand what really drives revenue. The first step is to determine what it is specifically that you want and why increasing your revenue will help you get there. Ask yourself these questions:
- What is your revenue forecast for this financial year? Is that a surprise or what you expected?
- What was your revenue in the prior 2 financial years? Is the trend going up or down or flat-lining? Is this trend a surprise?
- If you could wave a magic wand and make perfect decisions for the next 12 months, what would you love your turnover to look like?
- What is this increased revenue going to allow you to do that you can’t already do? (I’m not going to give you any hints here because it’s completely on you. I want you to really really think about what this increase in revenue is going to do for you? How would you put that increase to work?)
- Now if in 12 months time you reach this target and you look back upon what you’ve achieved, how will this make you feel?
- And how will you know you have reached the target? What will remind or show you that ‘yes I’ve done it’?
- The last two questions you need to ask yourself are what are the consequences of not making any change and is something you’d like to change later or sooner?
So you might be wondering why only 3 of the above bullet points relate to actually looking at the numbers? Well until you can really connect with what it is you are trying to achieve, what is that burning desire, then you’ll have a hard time achieving something you only kinda want? Have you ever only kinda wanted to get out of bed or kinda wanted to go for a run? Makes it a bit hard to actually follow through with it.
So let’s say you’ve got your number and your why and for this example we are going to use the target number as $1,500,000. In previous years you have floated around $1.2M to $1.3M and you have been busy working the business and it grew steadily to this point but has plateaued in this range for a few years and it’s starting to give you the shits. Now let’s say in the last 12 months you have revenue of $1.3M so to achieve this increase to $1.5M revenue needs to increase by $200,000 or 16%. This is the point where most businesses get stuck so here are six ways to increase it. But first, you need to know what makes up the current $1.3M worth of revenue and we are going to use the same 6 questions:
- How many current buying customers do you have?
- How many of them stay with you each year?
- How many leads did you receive this year?
- How many of those leads converted over to a buying customer?
- What is your average transaction per client?
- What is your average transaction value?
This is the secret sauce of increasing revenue that I use in every Virtual CFO clients business where we are increasing revenue. I even use it myself in my own businesses. Here is a basic flowchart that I use to breakdown and visualise the numbers. I have played with the numbers to fit in with our above example:
So based on the above and my preceding questions:
- You have 301 existing customers at the start of the year (refer to your CRM or look through your invoices issued in the prior year to determine clients you had as at the start of the year).
- 87% of them stayed with you each year (so look at last years invoices and compare to this years invoices and see what clients have dropped off)
- You had 150 inbound leads (if you aren’t tracking your leads, you should be. Get a CRM. Just google CRM)
- Of those leads, you converted 50% of them to new buying customers. (You should be tracking this as well on your CRM. A little hack is to look at customers you have invoiced that weren’t invoiced last year. They’ll probably be newly converted leads).
- Your average transaction per customer is 3. Again look at invoices and work out the average. A Google spreadsheet or Excel can do this in seconds).
- The average transaction value was $1,287 (again, look at all invoiced amounts for the year and use a Google spreadsheet or Excel to work out average).
So now you’ve got clarity on what actually makes up that $1.3M worth of revenue (or turnover or sales, whatever you like to call it). But what about getting it to $1.5M how do we do that? Let’s run through it again:
- See above that Total Customers at the end of the year is 337 so that’s the number we’ll use as Existing Customers starting in our new year.
- Let’s say pricing is a little off and you want to tweak that number so we’ve made a change there (refer point 6). Some customers may leave which is fine because in most cases (read: all the time) they are bottom feeders that only want a cheap deal and consume resources.
- In this year you’ve engaged a part time marketing expert (offshore – that’s another blog) to help out and super conservatively you think leads will increase by 10%.
- At the same time you’ve given your website some love (offshore that too) and with the new marketing efforts you think you can conservatively increase conversions by 10%.
- You decide Average transactions will stay the same
- And lastly you’ve put your prices up by a measly 5% (almost everyone out there is undercharging! Another blog and rant on its own)
So this is how it looks:
All that has happened is that leads and conversions are up 10%, prices are up 5% and retention of existing customers have dropped off a tad. BANG there’s your $1,500,363. Keep in mind that you can tweak any of these six components to increase your revenue and become laser focused on exactly what specific driver of sales needs improving. So you can now chunk down to a per month basis meaning you are targeting 14 leads per month (165 / 12 months) and you want to convert 8 of those into paying customers. Increasing the average transaction value is easy, put your price up. Done. As long as average transactions stay the same (or better) and your retention rate is monitored, there’s no reason you can’t reach $1.5M.
So the steps are:
- determine where you are right now and what makes up your current turnover
- which of these six metrics can be improved to increase revenue to your desired number
- constantly monitor your numbers and have someone keep you accountable. If you aren’t hitting your targets pin point why and act upon it!
I help my Virtual CFO clients on a monthly basis in our Monitoring and Accountability Programs by preparing the numbers and reports and walking through what it all means and whether they are hitting their targets. By regularly catching up they gain insights into how the business is tracking and together we can make strategic changes on the fly to get back on track and fix any problems or bottlenecks.