Tag Archives | revenue

Customer Profitability

Customer Profitability Definition

The customer profitability definition is “the profit the firm makes from serving a customer or customer group over a specified period of time, specifically the difference between the revenues earned from and the costs associated with the customer relationship in a specified period” (Wikipedia). In other words, customer profitability focuses on the profitability of a specific customer. How much revenue do they bring in? How much time, resources, etc. do they require from your company? By calculating the profitability of each customer, you have some great business insights on productivity, resource allocation, etc.

For example, if your customer service department is overwhelmed with work, then you can assess the number of requests per paying client. If a customer that is at the towards the bottom for revenue and the top for requests, then you can conclude several things. Those can include that you need to either increase their price, fire that customer, or limit the amount of requests for that customer.

The Purpose of Measuring Customer Profitability

Customer profitability is a key metric utilized to inform decision making in various areas of the company. These decisions affect the value exchange between the customer and the company. Once we measure the profitability of our customers, we are now able to understand who our customers are and how we make a profit. It can provide great insights on the business that lead to focusing on what is best for the customer.

How to Measure Customer Profitability

Before you measure the profitability of customers, you need to confirm how your company calculates revenue and expenses. Remember, Profit = Revenue – Expenses. Some companies recognize revenue when it is received (cash basis accounting). But we recommend that organizations use accrual basis accounting – or recognize revenue when it is earned. If you are bigger than a hot dog stand, then you should be using accrual accounting. In regards to expenses, it’s also important to allocate as many expenses through the customer as possible. Think about capital, debt, operational costs, etc.

Once you have figured out the respective revenue and expenses for a specific customer, then you are able to calculate its profitability. Next, you need an analysis all of your customers.

Customer Profitability Key Performance Indicators

There are various KPI’s that can help you understand how your customer profitability is doing at the moment. Here are examples of a few:

Average Revenue Per User (ARPU)

A measurement of the average revenue generated by each user or subscriber of a given service. Use the following formula to calculate the average revenue per user (ARPU):

 Total Revenue / Total # of Subscribers 

Customer Lifetime Value (CLV)

A projection of the entire net profit generated from a customer over their entire relationship with the company. Use the following formula to calculate the customer lifetime value (CLV):

Annual profit per customer X Average number of years that they remain a customer – the initial cost of customer acquisition

If your customer isn’t valuable or is costing you too much, then reassess your pricing. Click here to learn how to price for profit with our Pricing for Profit Inspection Guide.

Customer Profitability Analysis

Customer analysis, defined as the process of analyzing customers and their habits, is one of the most important areas of study in a business.

By observing the actions of various customers you start to see a trend of what your average customer is like and what their habits look like. This is a hint at who your target market could be. Behavioral trends amongst customers are important in how your company decides to carry on their marketing efforts. Once you analyze your customer base and determine your most profitable customers it is important to allocate the majority of your efforts towards them to make your most profitable customer your target customer.

Managing Customer Profitability

Managing customer profitability is larger than just the sales or fulfillment of product/service for the customer. It also includes marketing, finance, customer service, product, and operations. If you manage the profitability of customers, then you will have a better chance of catching areas of inefficiencies.

Areas to Improve Profitability

Some ways to improve customer profitability are to change the way you provide commission to the salesperson. Instead of paying their commission based on revenue, base it on the profitability. This can either be focused on the margin percentage (i.e. a sliding scale) or on the dollar amount in profits.

Why It’s Important to Manage

Managing customer profitability is important for various reasons, not only does it set you apart from the competition by providing more value to your customers, but it also improves the company’s revenues. When you manage customer profitability you are making the value exchange from company to customer more efficient and more profitable.

If you are looking for other ways to improve profitability, then download our Pricing for Profit Inspection Guide.

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How CFOs Can Drive Revenue Growth

How CFOs Can Drive Revenue Growth

The financial type is stereotypically called a “bean counter” because they focus primarily on the costs or overhead. That’s the easy route to take. They can manage the costs without having to walk outside their office or cubical to talk to another person or department. But a financial leader needs to help drive revenue growth in their company to create real success. We’re looking at how CFOs can drive revenue growth in this blog. First, let’s look at why you should not just cut costs, but drive revenue. Remember, it is easy to cut costs, it is really hard to cut the right costs.

Don’t Just Cut Costs… Drive Revenue

The typical CFO is managing cash flow and profitability. But we have talked with so many CFOs and they say, “revenue isn’t my job.”  Well, it should be. If there is no revenue, you do not have a job.

Why Cutting Costs Doesn’t Equal Success

The sales team is responsible for revenue and the CFO is responsible for everything else… Right? That’s the common misconception among the financial leadership. But the financial function needs to be more involved in sales than they are right now. Cutting costs (aka being a bean counter) does not equal success. Focusing on only cutting costs is a very short-term strategy.  If your organization is a going concern you want a long-term strategy which includes cutting the right costs as well as revenue growth, improved margins and ultimately profitability.

For example, there’s an economic downturn. You as the financial leader are cutting fixed costs, evaluating expenses, not giving out bonuses, etc. Cash is tight. And the money isn’t coming in with this downturn. At one point, you are going to be extremely lean in your overhead and you can’t cut anything else. What happens if the downturn continues another 18 months? You’re going to be out of business or in debt.

The CFO cannot just focus on overhead. They need to be looking at more cost-effective vendors, work on improving productivity and efficiency, innovating with the CEO and sales team, focusing on the more profitable customers, and forecasting the sales potential. Basically, the CFO needs to be thinking of ways to bring in more cash while keeping costs down… hence improving profitability.  Many of the most successful CFOs end up as the CEO.  Well guess what, the CEO worries about everything, including sales and profitability.  If you are next in line as the current CFO, are you really prepared to step into that CEO role?  Are you thinking like a CEO?  A good CFO actually thinks like a CEO.

Click here to access our Goldilocks Sales Method and learn how to build your sales pipeline and project accurately.

How CFOs Can Drive Revenue GrowthHow CFOs Can Drive Revenue Growth

When you look at how CFOs can drive revenue growth, you need to look at leadership. Who is the financial leader?  In other words, they may be chief; but are they able to lead a group of people to accomplish a goal. Let’s look at how a CFO can align finance / marketing departments, and not be a CFnO, but have data transparency, and be a successful financial leader.

Align Finance & Marketing Departments

As an example, finance, marketing and sales should be close to one another as one is managing the money and the later wants to spend the money to make more money. These three departments should be on the same page and in sync with one another. Think about when you (the CFO) create a budget. That budget is useless unless your company follows it. You need to manage the marketing department and your sales people need to inform you with their sales projections, what they need to accomplish their goals, etc.  Hopefully this was all captured when you created your annual budget.

For example, I work with my Director of Marketing to make sure we are on the same page as far as marketing goals are concerned, see what she needs to accomplish her job, and to hold her accountable. It could be easy to let her just be a detached marketer, but I would risk spending money that we don’t have, pursuing customers that aren’t profitable, and focusing on the wrong things. We talk about our budget on a weekly basis.

Don’t be a CFnO

We’ve talked about it before on our blog as well as in our coaching workshops. To be a successful financial leader, do not be a CFnO. What is a CFnO? It’s when the CFO only looks at the numbers and rejects every idea that the management team or CEO has or wants to pitch. Imagine you are trying to drive the company forward and invest in areas that you think will be profitable. Then imagine someone looking over your shoulder repeating no, there’s not enough money for that, not until you do X, Y, and Z, etc. You probably wouldn’t like that very much. They don’t either.

Instead, give them the chance to elaborate on their idea. Ask questions like:

  • What would success look like to you?
  • How many sales do you think this would generate monthly/annually?
  • What do you need to make this successful?
  • What are some of the risks or challenges you foresee?
  • Where does this align with the rest of the priorities of the company?

You can also tell them this is what we need to do first before we can venture into this new idea/product/investment/etc.

How CFOs Can Drive Revenue GrowthBe Transparent With Data

Do you ever feel that you’re missing a figurative piece to the puzzle? If so, you’re not alone. Many financial leaders are not able to make the right strategic decision (or any decision at all) because they don’t have all the information and analytics they need to budget, forecast, anticipate disruptions, etc. In “Dun & Bradstreet’s recent 2016 Enterprise Analytics Study, [they reported that] only 38% of companies share analytical insights across departments” (Dun & Bradstreet). That is a big problem. Dun & Bradstreet also argued that “with a cross-functional foundation and analytics toolbox, CFOs can improve their organization’s position in the industry, better manage assets, budget more effectively, and predict potential organizational disruption.”

Forecast your sales accurately with our Goldilocks Sales Method! The days of aiming too high or too low are long gone.

How CFOs can drive revenue growth revolves around the data they have. They should have access to the following:

Transparency of data helps the CFO or financial leader see the entire picture and steer the CEO in the right direction towards revenue growth.

Be a Financial Leader

In conclusion, the CFO needs to be a financial leader. We emphasize leader because it requires you to communicate, have vision, be honest, and make confident decisions. As you learn how to drive revenue as the financial leader, rebuild your sales pipeline and project accurately with our Goldilocks Sales Method whitepaper. This is one tool that will help you project just right – not too high or low.

How CFOs Can Drive Revenue Growth

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Demystifying the 80/20 Rule

Whether you are working with a client, putting together a reporting package, networking with potentialtheory, or closing the books, there’s a rule you can apply to make your life easier. This rule is probably one that you’re very familiar with – regardless of whether you practice it. When you are completing a job, there always seems to be a few things that push the needle further than anything else. This is the 80/20 rule.

Using the 80/20 rule is a great way to be a more effective financial leader. Click here to read more about how you can be a highly effective CFO.

What is the 80/20 Rule?

Simply put, the 80/20 rule is where 20% of the work results in 80% of the outcome. Likewise, 80% of the work only results in 20% of the outcome. While the numbers may not be spot on, the theory holds true in pretty much everything you do.

In the early 20th century, Vilfredo Pareto, an Italian economist, introduced this concept to explain the distribution of wealth in his home country – Italy. It first came about when roughly 20% of his pea pods made 80% of the total number of peas grown. As he continued to test this theory, he expanded it into other areas of macroeconomics (wealth distribution). Then roughly 30 years later, Joseph Juran applied the 80/20 rule to business production methods. He explained this rule “the vital few and the trivial many.”

Demystifying the 80/20 Rule

Many may argue that it’s not exactly 80/20, and you would be correct. It may even be 99/1 if you look at a particular situation. But as we demystify the 80/20 rule, we need to be thinking from a macro viewpoint. What is the minimal amount of work you can do to result in the most work.

How It Applies to Financial Leadership

As the financial leader of your company, it’s so important to know what pushes the proverbial needle forward the most. Look at your team, your fulfillment, your customers, your vendors. Then look at your role in the company. What work can you do that will result in bigger and better outcomes? Identify the work that takes up the most time without providing much. You may consider having a lower level employee work on those tasks. If that 80% work is too sensitive, then restructure your day to allow for the most time sensitive issues to be front and center.

80/20 Rule

Customer vs Revenue Relationship

Because there is no business without its customers, let’s look at the relationship between customers and revenue.

Who are your best customers? They are the ones who pay their invoices on time, don’t require extra time from your team, and never complain. They are also your most profitable customers. These customers are your 20%ers, and they make up 80% of your revenue!

But then, there are those customers who you dread receiving a call from because you know it’s going to be yet another complaint. These unprofitable customers suck your time, resources, and money. They make up 80% of your customer support/implementation/sales. Yet, because they take advantage of you, they only result in 20% of the company’s revenue (and less in profit). If you are overrun by profitable customers, you may want to think about firing that customer.

An effective financial leader is able to guide their CEO through the numbers and demystifying what may be unclear to them. If you want to more effective, click here to download the 7 Habits of Highly Effective CFOs to become a more valuable leader.

Improve Your Productivity by Applying the 80/20 Rule

If you desire for your team to be more productive, then you need to start with yourself. A fish rots from the head down. Start by analyzing your to do list. Are there a few things that will make a big difference? If so, prioritize those over everything else. Remember, not everything on your to do list will have the same impact or risk. A great way to assess the weight of each task is to use “tags” labeled: non-essential, essential, and critical. Are you chasing administrative tasks or completing the same tasks over and over? Ask yourself whether those can be automated or if a less expensive employee can complete them.

Why You Need to Be More Productive

There are so many squirrels that you could chase! There’s a million ideas that are all million-dollar ideas. But what do you need to do to meet your goals? If you continue to get bogged down by things in the 80% pile, then you risk never reaching your or your company’s goals. You need to be more productive, more streamlined. Although many see automation as a risk, we see it as an opportunity to force ourselves to be more productive.

How It Impacts How Effective You Are

When you apply the 80/20 rule to your leadership and workspace, you become more productive. You are then able to see clearly what is going to push the needle further. In our experience, our client’s experience, and our vendor’s experience, there are just a few indicators that hold much more weight. Think about it this way… If you listed everything you need to improve, you would never get it all done. You simply don’t have enough time to do everything! But you do have enough time to focus on the 20% and reap the 80%.

Lead From the 40,000 Foot Level

An effective financial leader leads from the 40,000 foot level. If you only look at an issue 2 inches away, then you are going to miss what’s causing it, what it’s impacting, etc. A good leader needs the entire picture before they make a decision for the company. This also helps you guide your CEO. Click here to download the 7 Habits of Highly Effective CFOs to find out how you can become a valuable financial leader.

80/20 Rule

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Are you maintaining accurate records?

maintaining accurate records

Have you ever sat down at your desk and seen papers everywhere, little to zero organization, and not been able to tell where your company stood financially right away? It is easy for financial leaders, executives, and other business leaders to get in this messy state. Sure, you may have once had accurate records and known exactly where you were. But maintaining accurate records consistently is a critical piece to positioning your company for sale, getting ready for growth, acquiring capital, etc.

Are you in the process of selling your company? The first thing to do is to identify “destroyers” that can impact your company’s value. Click here to download your free “Top 10 Destroyers of Value“.

First, what is accurate or accuracy? Oxford Dictionaries defines accuracy as “the quality or state of being correct or precise.” If your company’s records are not consistently correct and precise, you may encounter some undesired results.

Are you maintaining accurate records?

A simple way to answer this question is to look at your records. Can you easily pull client reports, tax filings for the past couple of years, or receipts from a specific vendor?  Are you able to find information quickly? How well are you able to manage your business with your current records?

Why Maintain Records

Maintaining accurate records is not just for external entities like the IRS, banks, venture capitalists, etc.; but it is also essential for major management decisions, customer support, and financial growth. It allows every party related to your business to see clearly where the company stands. Banks, attorneys, decision makers, etc. all need to understand how your company is positioned. “These records will help you analyze your business’s profitability, stay out of trouble with tax authorities, maintain positive relationships with clients and vendors, protect your business from lawsuits and win lawsuits if you are harmed” (Investopedia).

maintaining accurate records

No one likes to drive blind, so why would you have disorganized, inaccurate records that blind you from seeing the whole picture when making decisions?

How to Maintain Records

There are several ways to maintain accurate records. These include identifying revenue streams, keeping track of invoices and receipts, preparing financial statements, tracking deductible expenses and preparing tax returns. Although these are not all the important records you should maintain, they are a good starting point.

Identify Revenue Streams

This might seem like the most obvious thing to do. But oftentimes we arrive at a new client to find they are mixing business and nonbusiness receipts as well as taxable/nontaxable sources of income. Separate for-profit and non-profit clients from each other. If you service multiple industries, it might be useful to separate your revenue streams by industry.

You don’t want to avoid looking at your business’s revenue. Where did that revenue come from? Is there an industry or type of business that is more profitable than others? Maintaining accurate records isn’t just for those outside the business, but it also will allow you to understand your entire company’s performance.

If you’re selling your company, buyers want to see each revenue stream clearly. By not having accurate records, you may be looking at destroyers of value. To improve the value of your company, identify and find solutions to those “destroyers” of value. Click here to download your free “Top 10 Destroyers of Value“.

Prepare Financial Statements

To prepare precise financial statements, it is critical that you maintain accurate records. Your income statement and balance sheet act as a window into how your business is performing. If the data isn’t 100% accurate, then any decisions made based on that data will not be the best decisions possible. This is because the information isn’t reliable. This can cause a disaster!

Keep Track of Invoices & Receipts

Because of the importance of tracking profitability, you as the financial leader should have a process to track your income and expenses. As a major tool in managing cash, regularly produce reports of the amount and composition of accounts receivables and accounts payable, what has been collected and paid. Not only will this create a system to time payments and encourage your team to collect, but your bank or creditor will be able to rely on your system. This is essential knowledge for the banks to know if you are in a financial crunch.

Prepare Tax Returns

Taxes are a necessary part of operating a business. When you produce tax returns, precise records are required. You need to report income, expenses, and debt on this document. Thankfully, this is not a major burden on your time as you should already have these three categories accurately measured and tracked as you need them to effectively measure the success of your business.

Track Deductible Expenses

Unless you track your deductible expenses throughout the year, you will most likely forget them when you prepare your tax returns. Be sure to create a file for all deductible expenses.

Tips in Maintaining Accurate Records

There are a couple tips and tricks to maintaining accurate records. Some of these include separating personal and business finances, having client files, storing contracts, and maintaining accounting/tax records.

Separate Personal & Business Finances

One of the top rules in operating your own company is to separate personal and business financials. When companies do not separate business and personal finances, records are muddled and there is no clear method to see what is personal and what is business. By doing this, you may run into tax issues, relationship issues, and inaccurate records.

Have Client Files

Separate each client into their own individual file. This will allow you to easily see when they started doing business with you, what work you’ve done with them, and how your relationship is progressing. In addition, you will be able to save time by picking up just one file for the client. And you will have everything you need to know about them in that folder. Need to have invoices, etc. in another folder? Make copies and put everything related to that specific client in their folder.

Store Contracts

When you get served with a lawsuit, it can be shocking. But the best way to combat the stress is to know exactly where to find everything you need to battle your accuser. Store and make copies of all contracts in one place. Then categorize the contacts by clients, employees, vendors, suppliers, etc.. Organize the contracts in a way that makes sense for your business.

Maintain Accounting & Tax Records

The worst offence in maintaining accurate records is not staying on top of your accounting and tax records. Instead of doing the past three months of accounting in a week, create a system to update, maintain, and produce reports regularly. Submit these report for your financial and executive team to view on a schedule.

One of the main “destroyers of value” is not consistently having accurate records. If you are looking to sell your company or just want to improve its value, download your free guide to avoiding things that take value away from you.

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Inconsistent Revenue Streams

When valuing a company, investors look for 3 things: reliable, guaranteed, and steady revenue streams. But what if your business model involves inconsistent revenue streams? Regardless of why your company is experiencing inconsistent revenue streams, it’s important to learn what is happening and how to resolve it.

Entrepreneurs (typically from a sales or operational background) and CFOs/Controllers (financial function) see this issue in completely different lights. But let’s get into the very definition of inconsistent revenue streams.

What is an “inconsistent revenue stream”?

An inconsistent revenue stream occurs when your product and/or service is not able to consistently provide a reliable revenue number to use for projections. One month you may sell 43 widgets while in the next month, you sell 2. This causes some serious problems with putting together sales projections, annual budgets, operational decisions, etc.

The problem with inconsistent revenue streams is that a lot of entrepreneurs survive off the “pops” — those moments of big return, when a calculated investment finally pays off, the moment when you land a big fish that has big business to offer you, the moment when you get a “Win.” But these are conditional occurrences that are inconsistent, sometimes unexpected, and may be dependent on a particular sales person, economic climate, or a referral based on your connections.

Destroyer of Value

Investors look at inconsistent revenue streams the same way they would look at a company that has made no sales in 3 years. It’s worthless to them from a predictive standpoint. Investing in a company with inconsistent revenue streams comes with high risk and questionable return. An investor that looks at a company that only survives off of those “pops” (that get entrepreneur’s blood rushing) will likely run far far away.

This type of inconsistency is what we call a “destroyer of value”.

To improve the value of your company, identify and find solutions to those “destroyers” of value. Click here to download your free “Top 10 Destroyers of Value“.

Identification of the Destroyer

It’s often said, if you can’t admit you have a problem, then you can’t solve the problem. The first major task is to identify if you have this particular destroyer in your company. There are a couple of things that you can look for. If you experience any of the following, the value of your company might be less than you would like:

  • Decreases in sales that aren’t reflective of economy
  • Surviving on the cash you made during a large sale
  • Extreme differences with month-over-month sales
  • Dependency on one or two sales persons
  • Reliance on a particular person or company for leads
  • A specific and narrow market that purchases in bulk only every so often

Whatever the signal is, identify it and write it down.

Solutions for the Destroyer

Instead of waiting for the stars to align, smart owners increase business value through the creation of a smaller, consistent revenue streams. This typically means a monthly payment from a wider audience. You might have a monthly membership with access to helpful content or you might have monthly, recurring work where businesses have contracted you for a lengthier amount of time at a discounted rate.

Creating a recurring revenue stream means consistent cash flow and a business that is less affected by change. Instead of relying on one big fish or several “pops,” these owners cast a wider net to obtain many little fish that are constantly putting food on the table.

You’re in a business with customers. These customers have needs. Find a way to consistently meet your customers’ needs. Add value to their lives, at a rate they feel is fair and unobtrusive, and you’ll end up with a higher and more consistent cash flow that a buyer will be willing to pay you top dollar for.

Reliable Revenue Streams

The main way to ensure that your company can consistently have revenue is to modify your revenue stream. Answer the basic questions: 1) how easily can you track and predict future months’ revenues? 2) who are your customers? 3) why are they buying your product more than once?

Recurring Subscription Model

From the customer’s point of view, a subscription for a product or service saves the customer time and hassle. What a lot of companies fail to realize is, subscription models for businesses provide value for the customer and the company.

Because a subscription model has high recurring revenue, a business has the ability to calculate the inventory, lifetime value of a customer, and options for promotional offers. According to John Warrillow, the creator of the Value Builder system, a business with a subscription model’s value “will be up to eight times that of a comparable business with very little recurring revenue.”

As you calculate your net present value, make sure there aren’t any other “destroyers” that could decrease the value of your company. Download your free “Top 10 Destroyers of Value“.

Other revenue streams

Other revenue models such as rentals, usage fees, freemium, and licensing are just a few more examples of reliable revenue streams. What do they all have in common? Convenience and consistency.

Conclusion

Don’t limit your business to the simple commercial and retail business. Choose the one that works well for your business and is predictable. Work smarter, not harder.

(Download the Top 10 Destroyers of Value to maximize the value of your company. Don’t let the destroyers take money from you!)

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Projecting Revenue

projecting revenueWhether times are good or bad, one task that companies still must undertake is projecting revenue.  The tougher the times, the more important these forecasts become.

When projecting revenue, it’s important to remember that your customer base is likely worldwide.  Consequently, you must consider what type of economy your customer is operating in to accurately forecast sales.

Market Based Economy vs. Command Based Economy

What’s the difference?

In terms of projecting revenue, a company in a market-based economy observes the general market and its supply/demand to create these financial forecasts. Pricing can be set under the supply and demand of a product or service within the marketplace. Generally, there is no government interaction.

A command-based economy is just like it sounds. The government monitors and sets the offerings of products and their prices.

(Click here to find out more information about Mixed Economies, the combination of market-based and command-based economies.)

Projecting Revenue

Here are some important steps in projecting revenue

Look at Historical Data

Find out the “whys” in your historical data. Compile all the quarterly data over the past 7 years. Let’s say you notice that there is a sudden dip around 2008 and then again in June 2014. Historically, those times were when financial crises occurred.

You also notice that there is a dip in the 3rd quarter of 2011. Nothing outside of the company happened, but after doing some digging, you remember that during that quarter, your company pulled an all-time favorite product from the shelves because it was too expensive to produce.

You know, people talk about this being an uncertain time. You know, all time is uncertain. I mean, it was uncertain back in – in 2007, we just didn’t know it was uncertain. It was – uncertain on September 10th, 2001. It was uncertain on October 18th, 1987, you just didn’t know it. – Warren Buffet

Now that you’ve taken a look at 7 years of quarterly financial data, you’re better able to identify what trends your company experiences. For us, we’ve observed seasonal cycles for particular services that we offer. But because we’re able to project the revenues for that particular service, we’re able to find other products or services to counter the low months.

While seasonal business can be very profitable, we prefer to have relatively consistent revenues throughout the year.

Check Your Surroundings

Your customer determines your bottom line. If your customer isn’t biting the line, then you have no fish to bring home.

Let’s take the 40,000 foot-level view.  Look at your customer’s customer. What’s going on that is causing them to not buy from your customer?  If your customer’s sales are down because their fish aren’t biting, they won’t be in a position to buy from you.

Check Basic Ratios

While projecting your revenues is important, it is crucial that you check your gross margin, operating gross profit, and other ratios to ensure that you are remaining profitable. If your projections show that you’re not able to cover your operating expenses, then a game plan needs to be put in place to deal with it.

Although this exercise seems obvious, we’ve found that clients often disregard the expense items under revenues that they have to cover. This can easily be solved by knowing your economics.

(We have a simple and free whitepaper that we’re offering to you that helps you examine the economics of your company. Download it here now!)

Be Ethical and Realistic

projecting revenueBusiness ethics should be relatively simple and easy to follow. But when lines get blurred, it gets difficult to see clearly. Recently, I was talking to someone (let’s call him Jake) who was previously in health care management. He had moved to a different company to be the director of physical therapy as the previous director had been promoted to regional manager. When Jake came in, he noticed that all of the projections for revenue had been inflated to show external shareholders that the location was doing a lot better than they really were.

Jake decided, rightly, that it was better for him to lower the projections so they would be realistic and accurate. It’s better to meet 95% of your projections than to only get about 50% of the way there.

Know Your Economics

Do you know your basic unit economics? This is one of the best ways (along with strategically pricing your product) to ensure that all decisions you make will be profitable.  When you’re preparing projections, it’s important to compare them to your unit economics to make sure that it all ties together.

In the end, you could be the most brilliant businessman or woman, but if your economics are bad, you won’t make money. Understand your economics to project your revenues effectively. Projections can be useful if done correctly!

When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact. – Warren Buffet

Not sure what your economics are or want to check to make sure they’re sound? Download our free Know Your Economics tool by clicking here or the image below.

projecting revenue

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projecting revenue

See also:

Cash Flow Projections

5 Ways to Prepare for Seasonality

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Cost Control vs Cost Reduction

cut costs There is a difference between cost control vs cost reduction. Most people think that controlling costs and reducing costs are one and the same when, in fact, they can generate two totally different outcomes.

The first thing you need to know is that you can’t grow a company by cost reduction alone. You can get short term gains but, eventually, they fade. When public companies reduce costs through a restructuring there is typically a  short term lift to their stock price. However, for the increased stock value to be sustainable they must grow revenue.

An example might be Barnes and Noble bookstores. No amount of cost cutting is going to change the situation that they find themselves in today. They must reinvent themselves and pivot.

So if we want to add value we must grow revenue, how do we do it? There are three ways that come to mind. We could develop new products or services, increase market share or increase selling efforts. What do all three of these strategies have in common?

You have to increase costs to increase revenue!

So instead of looking for the lowest cost in a transaction you should look, instead, for the largest value received per dollar spent. It is easy to apply this train of thought to selling costs, marketing costs or product development costs, but what about overhead?

Does hiring the candidate at the lowest salary translate into a good value proposition? Does paying a premium get you a better employee?

The answer is: “it depends”. You should evaluate each cost incurred in light of the excess value received and the goals of your company.

We knew a company who wanted to spend as little as possible on their accounting staff. So they hired the cheapest accountants they could find not the most competent. In the end, they spent more money on cleaning up the financial statements, bringing them current and completing the year-end audit than the savings recognized.

The moral of this story is that you can’t build a house with only a hammer. Consequently, you can’t grow a company profitably by just focusing on cost reduction.

Learn how to apply concepts like this in your career with CFO Coaching.  Learn More

cost control vs cost reduction

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