When you’re building a business, it’s incredibly important to do the right calculations. A company selling a product or a service has to be able to decide what their revenue must be, what they want it to be, and the way they’ve structured what they do to meet those targets. This is something that is often forgotten, particularly by younger companies that are in their first or second year of business, but also by experienced business people with decades of running an enterprise under their belts!
Let’s say there’s a business whose owners might tell you, they’re charging $50 for every product. They’re aiming to get to $1,000,000 worth of sales, and that’s an incredibly achievable goal. After all, that’s only 20,000 sales, and if you have the right product, it’s not an inconceivable number to crack.
But when you investigate it a little further, you’ll see that for each customer, they’re paying around$20 in advertising and marketing costs just to acquire them. And then you look again, and you can see that the product is going to cost $20 to manufacture, and the staffing and logistics costs haven’t been calculated, and they’re lucky to be squeezing a few dollars in margins on every sale. For a million dollars’ sales to be reduced down to $60-70k is a tough scrape. For many companies, having the right groundwork could prevent that kind of difficulty, and it could help them optimise the way they do business.
In the end, it comes down to understanding the numbers behind every aspect of what you. Understanding the pricing of your products, the costs involved with providing them to the right customers, and how it’s all going to impact your bottom line. A business sinks or swims on those calculations.
Those kinds of calculations have been failed and forgotten by companies with massive valuations. Again, there’s that old joke about Pets.com – “we lose money on every sale, but we make it up in volume…” That’s just never going to add up. If you’re looking at growth or scale, this becomes even more crucial. Turning a business into something that can expand, that can develop more products and serve more customers is always going to be about getting those initial calculations right and ensuring that you’re not going to miss out on the right targets and the right revenue.
If you’ve gone through the numbers before you even kick everything off, you stand a much better chance of succeeding. This is one of the key areas we often assist our clients with, working through the right calculations and ensuring they are setting their company up to succeed in the short term and exceed in the long term. When you can be confident that the very calculations that must work every single day in order for your business to stay afloat have been put together the right way, by advisors who know business inside and out, you can be confident that your company has the room, the ability and the resources to grow.