Knowing Your Business NumbersAn essential part of running your business is looking at your business results and using those figures to give you a more in depth analysis of how your business stacks up, with a view to growing your business.

 

Ideally, you do not want to be doing that after your accountant has prepared your accounts as these figures will be historical and will superseded in relevance by your trading results since then.

 

You want figures that are as up to date as possible, ideally the previous month.

Today I am going to look at:

  • Profit
  • The Cost of Acquiring A Lead, and
  • The Lifetime Value of a Customer

Profit
You or your bookkeeper should be able to get at this figure from your last months’ accounts.  This is the amount of money your business is actually making each month: income less expenditure, and excludes VAT and any capital expenditure such as equipment.

A lot of business owners confuse this with the money they have in the bank and if you are not sure how your net profit relates to the money you have in the bank then click here.

Knowing your profit gives you the information you need on which to build your business over the coming weeks, months and in the next year according to the targets you have set for your business.

The Cost of Acquiring A Lead
You want to know how much this costs to ensure that:
a) It does not cost more to acquire a lead than that person might spend with you
b) If there is any room in your budget to increase the cost to get that sale, and
c) What area of your marketing is most effective
This is the cost of getting someone to take action on your website, which would be contacting you or completing a form
If you have retail premises this would be the cost of getting someone through the door

To determine the effectiveness of a marketing campaign you need to be able to track each piece of marketing.
Online you can do this with Google Analytics, a free service which gives you individual tracking urls.
Offline you can do this with a tracking phone numbers service for example

To calculate the cost of a lead you would divide the cost of the advertising by the number of leads from that piece of marketing

Cost of Marketing (£)
—————–     = Cost per lead (£)
No of leads

Lifetime Value of a Customer
On average how much does each customer or client spend with you for as long as they are a customer or a client?
On average how long are they a customer?

Lets say you have a customer that has spent £3000 with you since she has been a customer
She has been a customer for 4 years

Therefore her average annual spend is £3000 divided by 4 = £750

To get an average for all clients then you need to look at:

  • Turnover (income/sales) since you’ve been in business
  • How long you have been in business
  • The number of customers over that period

So using some numbers:
Turnover: £350,000
In Business: 3 years
No of customers: 27

Lifetime value = £350,000/27 = £12962.96
Average annual spend = £12963/3 = £4321

So remember earlier we were looking at the cost of acquiring a lead?  Well we now know how much that person might spend on average when they become a customer.

Now consider your other annual business costs (aside from marketing) in servicing those customers.

Lets assume that annual cost per customer is £1250

Therefore the net amount available for advertising is £4321-£1250 = £3071

Not all leads turn into clients so you also need to know how many leads it takes to get one paying customer.
Let’s say for every ten leads you get one paying customer, or 1 in 10

Therefore your cost per lead, that you worked out earlier, needs to be multiplied by 10.

So, today we have looked at:

  • Knowing your business profitability
  • The cost of acquiring a lead for your business
  • The lifetime value of a customer
  • Using this information to inform your marketing spend

Look at your business figures and let me know how you get on below

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