Four Things Every Business Owner Should Always Know
Like most business owners, the majority of your work day is spent servicing clients, reviewing sales, preparing for appointments and attending to the day-to-day operations of managing your business. During my client interactions and meetings, I am fascinated with the number of businesses that do not full fully comprehend the actual and real costs of operating their business. Here are four essential things every business owner should know.
1. Gross profit equals revenue minus cost of goods sold or services delivered. Gross profit is impacted by everything from marketing to sales to delivery of goods or services. These costs represent the core functions of your business required to service your customers. For example, sales are the revenues received when a good or service is provided. Cost of goods or cost to service will vary by industry. Exclude office expenses, salaries, payroll taxes, advertising, marketing or sales expenses, rent, etc. in cost of goods. Knowing your gross profit will ensure you understand your financial health.
2. Income to Expense Ratio is calculated by dividing the total operating expenses by revenues. Understanding what it costs to operate your business compared to the income that the business generates is essential to ensure your long-term survival. One good practice is to compare all buckets of expenses, such as marketing, sales, administrative, utilities, insurance, taxes and maintenance, to the gross operating income to understand what is highest and lowest contributor to expenses.
3. Customer Acquisition Cost-How much does it cost to acquire a new customer. How much money do you spend on online and offline sales and marketing? If you print brochures, attend events to get leads and sales, run ads online and offline, market via email campaigns, have a lead capture on your website then all these costs should be factored into your customer acquisition costs. To compute the customer acquisition cost, take your entire cost of sales and marketing over a given period, including salaries and other headcount related expenses, and divide it by the number of customers that you acquired in that period. As a part of your marketing planning, fully comprehend your customer acquisition cost. Many businesses fail because they are not aware of how much it actually costs them to turn a prospect into a customer.
4. Lifetime Customer Value is the amount of gross revenue expected to be earned from each customer over a specific time period. This calculation should factor in all costs for supporting your product or services along with the cost of goods sold. Each business should know how much revenue is generated from each customer. The key here is to be able to track repeat business, and to know how much each customer averages over the lifetime of the relationship. One quick way to remember the Lifetime Customer Value is the net profit divided by number of clients over a given period. It seems self-explanatory that each business should have a grasp on true costs; however, it never hurts to have a refresher. Spend time evaluating and reviewing the costs to manage your business.