Big Picture First
Being in business is full of complications and distractions. To be successful you need to be very clear about how your business is doing. The only way to do that is to measure and see how it is changing as time passes.
You don’t have to invent this yourself. There are specific Key Numbers that almost all businesses use, and you should know what these are for your business. All these Key Numbers are explained later in this BLOG/SHEET, but this is how they fit together.
First, you reach out and get as many Leads as you can. From this pool of Leads you will get some that respond, these become your Prospects. Only some of these Prospects will eventually become customers by purchasing from you. This conversion success rate is your Customer Conversion %. These customers will give you orders, you must count them because they are your Number of Sales. The total of the money from the Number of Sales is called your Turnover. Knowing these two figures you calculate your Average Sales Price. All businesses have costs, some are related to the products you sell known as Cost of Sales while others are Fixed Costs which will happen even if you don’t make any sales. By subtracting the Cost of Sales from your Turnover you can calculate your Gross Profit. Your Gross Profit a is very important Key Number and you must ensure you know this at all times. The future of your business depends on the simple fact that you can only make a Net Profit if your Gross Profit is greater than your Fixed Costs.
When you know these Key Numbers for your business you will be able to manage your business properly. You will know what the most important issue is to focus on, and you will then be able to know if what you choose to do is working. If you don’t know your Key Numbers then you’re trusting to luck.
Your Time Frame
Before you begin to work out your Key Numbers you must decide what period of time you are taking your numbers from. It can be a week, a month, 3 months, or a year but you must be consistent. To begin you should start with the shortest period possible so that you do establish a set of numbers to work with as quickly as possible. The longer the period the more accurate your numbers will become. In the figures below the figures are all based on a Time Frame of a month.
Your 11 Key Numbers
Leads
The first Key number is Leads, this includes all the potential customers your business is exposed to; it may be the number of website visitors you get, your high street footfall, the number of homes in an area that receive your flyer or see a published advert. There are many sources that can contribute towards this number depending on how your business works. Essentially think of this as the top of a funnel, it is the total number of Leads you can reach you are counting and reaching them costs time and money.
Prospects
The difference between a lead and a prospect is that a prospect has revealed an interest. The level of interest can vary and is often described as a temperature where a hot lead might be easier to convert to become a customer while a warm lead might need more work. However the basic issue is, a prospect must be somebody or something you can work on, you now have contact or knowledge about the original lead.
What makes someone a prospect as opposed to a lead will differ between businesses. In our business, for instance, a lead becomes a prospect when they make a Discovery Call or interact with us via our website.
Prospect Conversion (%)
Consider a cleaning business for example. If 2000 leaflets (Leads) were dropped at local houses in a month and as a result 100 people (Prospects) make an enquiry. Your Prospect conversion (%) is (100/2000) x 100 = 5%
This key number is the share of leads you convert into someone who has expressed an interest in your product or service. For example, opted into a mailing list, filled in an opt-in form on your website, walked into your premises or phoned you.
Number of Sales
Not every prospect will become a customer, but some will. It is important to count every order from every customer, to gather the Number of Sales. You will need to consider first if you prefer to regard a sale as a complete order (several items) or count individual items. However, you must be consistent.
Using the cleaning business example again, 100 Prospects made an enquiry, and 9 people place an order. The Number of Sales = 9
Customer conversion (%)
The rate at which prospects turn into customers is your Customer Conversion %. This is important because it defines how many Prospects and in turn how many Leads you needed.
Using our cleaning business example again, 100 people (100 Prospects) made an enquiry, and resulted in a Number of Sales of 9. Therefore, the Customer conversion (%) is (9/100) x 100 = 9%
Turnover
The total value of all your sales over a period of time, say a month, is your Turnover.
Using our cleaning business example again the 9 orders created £1800 of Turnover
Average Sales Price
For all businesses individual orders vary in value. However, for most businesses the Average Sales Price of all orders together over time is often stable. The Average Sales Price is the total value of all your sales Turnover, divided by your Number of Sales.
Using our cleaning business example. Turnover/Number of Sales £1800/9 = £200 Average Sales Price
Advice about ‘rounding’. The numbers don’t have to be exact to the nearest penny, one business may work to the nearest £1,000 or might work to the nearest £1, there is usually no need to go to decimal places. This is about seeing the big picture.
Cost of Sales
At the simplest level this may be the cost to you of the products that you purchase to sell on, but it can be much more complicated in manufacturing. The principal is the same in either case what you are identifying here is the remaining value of the products you sell after you have paid for them to be ready to sell to your customers.
Using our cleaning business example. The Cost of Sales was £1160. This included £1000 paid to sub-contractors and £160 for various cleaning products.
Fixed Costs
These can vary but many businesses and might include administration, payroll, insurance, premises rent etc. Basically, these costs must be paid even if no sales are made.
Using our cleaning business example. The Fixed Costs were Insurance at £50 and the leaflet drop £50. £100 Fixed Costs.
Gross Profit
Your Gross Profit is what is left over when you take away your Cost of Sales from your Turnover. This is the money you now have left to pay your Fixed Costs.
Using the cleaning business example. The Turnover was £1800 and the Cost of Sales was £1160 which means your Gross Profit is £1800 – £1160 = £640 Gross Profit.
Net Profit
This is the star of the show, did we make anything for the effort? Your Net Profit is what is left or what you owe when you look at your Key Numbers. The Net Profit is Gross Profit – Fixed Costs. Once you create an actual Net Profit, you can start to grow. Perhaps you could choose to increase your marketing budget to reach more Leads and grow your business.
Using our cleaning business example: £640 Gross Profit – £100 Fixed Costs = £540 Net Profit.
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