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Understanding the fundamentals

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It is common for a business owner to come and see us thinking that they have to reinvent the wheel to make the business better. Don’t get me wrong change is good but radical change is not something that a lot of people can deal with and a radical change to a business will cause massive disruption quite often leading to failure.

What is usually required is small tweaks that will have a significant impact on the bottom line. All business are fundamentally the same in that the key drivers of business are

  • Lead generation
  • Conversion rate
  • Retention rate of existing customers
  • Frequency of a customer purchase
  • Average dollar spend per visit
  • Efficiency in doing the work

 
When I ask the question on some of these statistics majority of businesses don’t know these key indicators. Majority of people know their net profit or revenue but as per a previous blog these are lag indicators (indicators of history). Being in business it is important to know the future and while it is a cliché historical performance is not an indicator of future performance.

Understanding that you require X amount of leads to generate a revenue that will cover your expenses is powerful. It is a lead indicator. Now let’s suppose that you know that from every 5 meetings you get 2 leads. Your conversion rate is 50% and therefore you will get one sale from every 5 meetings. If you know your average sale is $5,000 and your monthly expenses are $50,000 you now know that you need 10 sales to cover your expenses. A step further tells us that you need 50 meetings to generate the required number of sales.

Now what to do with that information. You can set targets for your sales team and it is a number that can be monitored closely. It is also a number that has some science behind it and not a number that you think is about right.  

We go through a similar exercise with every client showing what is possible with minor adjustments. It is the start of a budget / forecast and certainly a talking point for what could be done to improve the business’s key areas.

Category
ABN
Published
10 Feb 2015
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