The end of financial year can be a time full of numbers. All business owners should have a good grasp on the numbers in their business though sadly many do not. There are however 3 numbers every business owner should know. Not just at the End of Financial Year, but every day of the year!
The 3 numbers every business owner should know are:
- Cost of goods sold (COGS)
This is the total cost you incur in providing or delivering your product or service. It includes all materials plus overheads (rent, phone etc) as well as your time. This is where most business owners get it wrong, they don’t allocate their time accurately or they heavily discount it. What you need to know is exactly what it costs you to deliver he product or service to the client including all pre and post work. There should also be a client acquisition cost in there which is any marketing or advertising cost that you incur to get the sale in the first place.
This is crucial information that many business owners don’t know.
Easy number to know and quote, what are you charging.
Separate to the price is the value the client receives. This needs to be greater than the price. As consumers we buy on value, not on price. If I pay $1 for something I need to get at least $1 worth of value – in my perception. In most cases it will need to be greater than $1.10 or $1.15 to make it worthwhile. The difference between the price and the value is what is called the ‘customer surplus” and it is a key figure in terms of business, pricing and marketing.
COGS = $60
Price = $100
Value = $105 (client 1), $180 (client 2), $300 (client 3)
If this is an example you can see that there is a clear area of profitability between the COGS of $60 and the sales price of $100. Looking at the value you can see that there are three clients all with different perceptions of value. Where the perception is $300 – that is a good client and a safe one. At $180 we are still doing well but at $105 I would say that we are in serious danger. That client at $105 is just hanging on. A one for one exchange of price for value is not enough, it is adequate but not sustainable.
So as the business owner do you invest in getting the $105 client up to $150 or do you let them disappear over time instead focusing your efforts on enhancing the offering two the $180’a and $300’s.
How do you know the value the client gets – you ask them. Yes they may won’t want to tell you but you will be able to get a measure even if it is in figures like double or 1.5 times. You need to have a fair idea at a minimum.
Knowing these three figures allows you to make good decisions about how to invest money in your business, how to price your offering and which clients you need to chase and which you need to lose.