Parts of Your Business

Leads are the number of ideal customers that have been made aware of you through your marketing efforts. This 'part' drives revenue because more leads, ideally, will result in more paying customers which will improve revenue. You improve leads by optimizing your marketing. Any money you spend on marketing should have a direct impact on leads received.

This is the percentage of leads that become paying customers. Whereas leads measure your marketing effectiveness, conversion rate measures your sales effectiveness. This 'part' drives revenue because if you can convert more of your leads to paying customers it will improve revenue. Let's say that your business has 10 leads last week. If you were able to convert 2 of those 10 leads into a paying customer than you have a 20% conversion rate.

2 customers / 10 leads = 20% conversion rate

This is a percentage of customers who come back each year. This 'part' drives revenue because if you can get existing customers to purchase again, it will improve revenue.  Let's say that you had 1,000 customers who purchased prior to December 31st of last year. If you were able to get just 5% of those customers to come back and purchase this year you would have 50 customers that already know, like and trust you that will spend money with you this year. 

This is the number of times a customer purchases from you in a year. This 'part' drives revenue because the more times you can get a customer to purchase from you, the more your revenue will increase. You can dramatically improve profit by getting existing customers to buy again. Not only will you be earning more from each customer, you wouldn't have to spend additional marketing dollars. 

This is the average value of every purchase a customer makes. This 'part' drives revenue because the more you can get a customer to spend, the more revenue will increase. Let's say that in your business, the average value is $500. By improving the average transaction value, to say, $600 you will see an increase to revenue without having to get new customers.

Leads

x Conversion Rate

= New Customers that purchase this year

Existing Customers

x Retention Rate

= Existing Customers that purchase this year

New Customers that purchase this year

+ Existing customers that purchase this year

= Total customers that purchase this year 

Total Customer that purchase this year

x Purchase Frequency Rate

= Total Sales Transactions

Total Sales Transactions

x Average Transaction Value

= Revenue

By improving one or more of the 'parts', you will improve revenue

This is how much it costs you to provide the 'goods' to each sales transaction and is measured as a percentage of revenue. The Cost of Goods should include all of the direct cost needed to deliver the end product or service to your customer. This 'part' drives profit because the lower you can get Cost of Goods down, the higher the profit. 

This is the total cost of marketing measured as a percentage of revenue. This 'part' drives profit because every dollar you spend on marketing should have a direct correlation to an increase in revenue. If that happens, you'll maintain a low Marketing Expense (as a percentage of revenue) and a high revenue, thus, improving profit.

This is the total amount of payroll not already included in Cost of Goods. This 'part' drives profit because every dollar you spend on payroll should have a direct correlation to an increase in profit. In other words, every employee on your team should either assist in improving revenue or reducing expenses (or both), thus improving profit.

This is all of the operational expenses that are incurred that are not already included in Cost of Goods, Marketing Expenses and Payroll Expense. This 'part' drives profit because every expense spent in your business should provide a 'return on investment'. If an expense does not provide a return, then you should not spend the money on the expense. Examples of operational expenses are rent, insurance and office supplied.

This is the total of all income and expenses that your business incurs that are unrelated to your business' core business.

Revenue (using parts 1 - 5)

- Cost of Goods

= Gross Profit

Gross Profit

- Marketing Expenses

- Payroll Expenses

- Overhead Expenses

= Net Profit from Operations

Net Profit from Operations

+ Other Income

- Other Expense

= Net Profit

This is the number of days it takes to collect from customers. This 'part' drives cash flow in that the longer it takes for you to collect from your customers the longer you are without cash flow. Ideally, you want this number to be lower rather than higher so that you have access to the cash sooner rather than later.

This is the number of days it takes for you to sell through your inventory, on average. This 'part' drives cash flow in that the longer it takes for you to sell through your inventory, the longer you are without cash flow. Ideally, you want this number to be lower rather than higher so that you have access to the cash sooner rather than later.

An asset is something that your business owns, such as a truck or a machine. When you sell it, you receive cash. Conversely, when you purchase an asset, it will decrease cash flow (unless you use debt). This 'part' drives cash flow in when you sell an asset, your cash flow will increase.

This is the number of days it takes for you to pay your suppliers. This 'part' drives cash flow in that the longer it takes for you to pay your suppliers, the more you get to hold on to your cash. 

Debt is the idea of borrowing money to fund your business. This money, of course, must be paid back to the lender. This 'part' drives cash flow in that when you buy things using debt you are not having to use cash, which improves cash flow. Of course, paying down debt will reduce cash flow as you are using cash to pay back the lender.

Owner investments are the amount of money that any owners of a business invest, from their personal funds, into the business. Owner Distributions are the amount of money that any owners of a business take out of their business for personal use. This 'part' drives cash flow in that the more investments into the business the more cash flow will improve.

All parts add up to Cash Flow using this formula:

Profit (using parts 1 - 10)

+/- Days Sales Outstanding

+/- Days Inventory Outstanding

+/- Sale or Purchase of Assets

+/- Days Payable Outstanding

+/- Using or Paying Down Debt

+/- Owner Investments or Distributions

Each of these parts have a + or - because  they can impact cash flow either positively or negatively.