Do you know the number one goal for all small businesses? The most important goal you should be head-strong focussed on until you are way past the $1,000,000 turnover mark is without a doubt, driving revenue. Many micro to small businesses put way too much energy into keeping their business super lean with low overheads, that they hinder the ability of the business to increase sales. By all means, I don’t want you to be reckless in your spending, but in order to grow and create a true business and shoot past that almighty $1,000,000 turnover mark, increasing revenue needs to be your focus.
One major issue you are going to find (and you may already be experiencing this) is that of Capacity. That is a whole other blog, maybe two or three blogs in itself, but it is basically being so busy that you completely run out of time to do anything- including taking on more work. In other words, you plateau.
In order to increase revenue, you need to understand the drivers of these numbers, which I’m now going to show you!
This is a flowchart that shows the 6 drivers that make up your sales figure:
So let me simply explain what this all means (Note: LY equals Last Year and TY equals This Year):
- Most (but not all) businesses will have Existing Clients that transact with them. You should know this number. If you don’t, then find it out, because I’m about to show you the simplest way to increase your sales. Of your current clients, some will drop off each year, which is expressed as your Retention Rate. As a percentage, how many clients do you keep each year? Multiply these figures together and you get Retained Clients.
- Leads are prospective clients that are interested in transacting with you but aren’t on board yet. This is where marketing comes in. Your Conversion Rate, expressed as a percentage, is how many of these leads you convert into a sale. Multiply these two and you get Acquired Customers.
- Add together Retained Clients and Acquired Customers and you get Total Customers.
Stay with me because you’ll start to see why tracking and monitoring your numbers is crucial.
- Next we have Transactions Per Year. So on average, how many times does the average customers transact with you. Some customers may buy off you 3 times a year, some two times and some only once.
- Lastly we have Average Transaction Value. This is the average amount per transaction. Some transaction may be $10,000 some may be $2,000 some may be $350. This number is simply the average.
- Now we multiple Total Customers by Transactions Per Year by Average Transaction Value and the answer is your total Sales figure.
So when you look at a Profit & Loss Statement, or your accountant tells you you made $309,510 in sales for the year, you can now see, in this example, what makes up that number.
In order to increase sales, you could simply improve just one of these 6 metrics and it would improve the number. I’ve made a couple of tweaks in the TY fields just so you can see the compound affect and realise that it really isn’t that difficult.
- So you can see the Existing Customers for TY is 172 which came from the Total Customers from LY.
- I have increased Leads from 60 to 80 and Conversion from 50% to 60% because let’s say you get some help with your marketing and digital strategy.
- The only other tweak I have made in TY is I have put your Average Transaction Value up by 10%, so from $1,500 to $1,650.
- You can now see, with only a couple of tweaks, Sales have improved to $384,516. That is an improvement of $75,006!
The great thing about running an exercise like this, is that you really get to understand where each metric is at. It might be that your Retention Rate is 96%, so almost everyone stays on board, but you have minimal leads, poor conversion and never put your prices up. Now you know where to focus your attention to keep driving sales.
That sounds pretty cool right!? Well it is. But the hardest part here is actually doing it. I like to call it, understanding your numbers. If I was to ask you the following, could you confidently answer:
- How many exiting clients do you have?
- How many leave and go elsewhere each year?
- How many leads do you receive each year?
- How many of those do you convert into customers?
To track these numbers, you need a CRM or Customer Relationship Management Platform. We use Xero Practice Manager which is cloud based and tailored to accountants operating in the cloud. There are plenty of fancy ones out there like Infusionsoft or Ontraport or SalesForce and a cheap no-frills CRM that we use in another business of mine is called CapsuleCRM.
Once you are able to populate these fields with your own numbers, you are able to make strategic as to which metrics are going to give you the biggest leverage to dramatically increase your revenue, which, as a small business, should be your number one goal!