As I listen to the news every night, this recession-plagued economy doesn’t appear to be getting any better and I know you’re probably feeling the pinch. The good news is that it doesn’t have to be that way. We are in control of our own destiny. Your own economy is measured only by the six inches between your ears. This blog is designed to give you a road map to growth in 2012 and beyond. The following five step formula is one of the most powerful equations for business growth that I have ever seen.
In this equation, you simply take the number of leads from all sources and multiply them times the conversion rate of those leads to give you new customers for the period. (For this purpose, we will consider the period to be the fiscal year.) Simply add the new customers to your customers retained from the previous year to give you your total number of customers.
Next, multiply your total number of customers times the average revenue per customer for the year to get total revenue.
Then, multiply your revenue times the gross margin your company generates to calculate your gross profit. Another way to look at this is that your gross profit is what is left over after you have paid the costs associated with delivering your product or service. These costs include things such as product cost, direct labor and sales commissions. Your gross margin is simply the percent of gross profit compared to your revenue. This is a very important percentage because you can use it to calculate break-even on any investment from expanding your physical space, to the cost of a new marketing campaign, to the return from hiring a business coach.
Finally, subtract your fixed expenses from your gross profit to come up with your net profit.
Most business owners that I talk with can come up with the elements (from this profit equation) that are listed in blue: Things like revenue, net profit and customers. These items are simply score cards. You cannot directly impact any of them. The only items on this equation that you can affect are the items in green. You can increase your leads, conversion rate, average revenue per customer, gross margin and reduce your fixed expenses. If you focus on each of these areas and increase each of them by just 10% except fixed expenses which you would reduce by just 10%, you can increase your revenues by 100% and increase your net profit by an amazing 200%.
Think about your own business. Do you know how many leads you receive in a given week or month? Do you know the source of those leads? Do you know what your conversion rate is? Do you know what your average revenue is from each customer? Do you know whether your marketing efforts are expenses or investments? If you do not know the answer to any, most or all of these questions, you should. Take the time to learn where your business is coming from and where it is going.
In future posts, I will explore each of these elements to help you come up with ways to grow each element by at least 10%.
Using this formula, I have helped clients double revenue and triple profits in one year.
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