Growth is the key to the success of any business. Most businesses will grow to the level of knowledge of the owner and then will tend to stagnate until that knowledge level is increased or an external force is applied to push the owner to grow. This is precisely why business coaching works so well. We provide additional knowledge to help business owners grow and then show up every week to hold the business owner accountable to agreed-upon weekly goals that will put this new knowledge to work.
The five-step profit equation formula is one of the most powerful equations for business growth that I have ever seen.
You simply take the number of leads from all sources and multiply them times the conversion rate of those leads to giving you new customers for the period. 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 your company’s gross margin to get 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 the profit equation that are listed in blue: Things like revenue, net profit, and customers. These items are simply scorecards. 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 could increase your revenues by 24% and increase your net profit by an amazing 95%.
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.