The Profit Growth Formula – Time to know your numbers (better than ever).
One of the biggest issues business owners have is not knowing their numbers. The very numbers that they should be using to show what is and isn’t working in their business to tell them where they should put more/ less focus and effort.
It’s no surprise. Business metrics are not taught in school (unless you take Business Studies), so if you are one of the millions that has started a business without any formal business qualifications, the reality is that you are batting blind.
You don’t know the importance of understanding your numbers. You don’t know what numbers you should be tracking. Add to this the excuse of not having the time to study them regularly or choosing to ignore them because you don’t like the bad news they will tell you, it’s not a great recipe for success.
Many engage (usually starts with their first) an accountant on price rather than value (don’t know what to ask for or are not prepared to pay) and the accountant doesn’t have the sales skills or desire to have the discussion about greater value – management accounts, reporting, cash-flow forecasting et al.
I’ll get off my soap-box on this before the ‘offended’ culprits look up from their quills in their rosewood boardrooms and scowl at me.
As a starter, here are the eight numbers you need to get a better handle on your recent performance (say 2024) and start to plan what needs doing to improve results for (say 2025).
Five require actionable strategies from you. The other three are bi-products of that action.
The Profit Growth Formula
Number of qualified leads in your pipeline X Conversion ratio = Number of clients
X
Average spend per transaction X Number of transactions = Revenue
X
Cost ratio = Profit
Now, if you plug your numbers in for a given period, say 2024, it should show you the correlation between your number of leads and your profit margin. That is step one.
Step two involves determining your targets. What do you want your profit to be? Put your desired profit figure down and work backwards through the formula using 2024 as a guide for what is possible and it will give you targets for 2025. Or simply identify what increase you can get from each area (for example, can you get your number of leads from X to Y?) and work through the formula to give a target profit level. Tweak until you have a suitable target.
Against each, ensure you have a clear set of actionable strategies to get from previous performance to desired goal. What marketing strategies are you adopting to increase the number of leads, what sales strategies to increase your conversion ratio, what strategies are you adopting to increase spend per client etc.
You get the idea.
Most small business owners fixate on number of clients, revenue and profit. The reality is that these are bi-products of actions taken elsewhere. Fixate on your number of leads, your conversion ratio, your spend per transaction or spend per client and your cost ratio. The strategies you adopt to maximise these will help you achieve the desired customers, revenue and profit.
In terms of determining the number of customers, you have two areas this comes from. New business is leads x conversion ratio. Existing business is existing customers x retention ratio. The sum is the total number of customers.
Try this table to map out yours for 2025.
These should be the key numbers for you to get started with understanding what is and isn’t working and where you should focus your effort.
I’ve said it before and i’ll say it again. If your accountant can’t or won’t step up and you don’t have the resource internally, get yourself a better accountant – they are worth every penny and more. Of course there are many great accountants out there that get this and are helping to shape the success of the business owners in high growth mode.
Once you have a handle on your numbers and regular scheduled time to review them, you will never look back and your results will only ever improve.
Best of luck mapping out your 2025 targets and strategies.
Are you ready to stop dithering and unlock your full potential? Curious about how I can help? Book a complimentary 30 minute call now and let’s explore your goals together.
