In recent years there has been a trend for business owners to hire coaches to provide guidance and strategic input. Unfortunately many businesses have been poorly advised by coaches who simply don’t understand the numbers. Without a solid grasp of the key drivers of revenue and profit an advisor can end up in dangerous territory. This is why accountants are the true trusted advisor (when they step up and embrace the role.)
Most business owners significantly underestimate what is possible in their businesses. Their growth plans are incremental because they have not been enlightened as to the true potential.
One of the first things you should want to know when looking at the potential to improve a business is what are the drivers of the business’s revenue. Very few business owners could tell you precisely how many customers they have. As such, this is a great discussion to have with any client.
In most businesses the revenue and profit drivers are as follows:
- Number of customers
- Average revenue per customer
- Customer churn rate (% customers lost per year)
- Number of leads generated
- Conversion rate to new customers
- Cost of goods sold %
To help your client understand the growth potential, the key is to break down the revenue and costs into these various drivers so that you can determine where most leverage resides to grow both the top and bottom line. The way to do this is to ask the client a series of questions:
‘John and Mary, your revenue last year was $2 million and your profit was $200,000. Which is more important to you – increasing revenue, or increasing profit?’
Simply listen to the client’s response and then ask:
‘Do you know where you need to focus to achieve that improvement?’
In most cases, the client will not have a firm plan in mind. And this is where you transition them into revenue or profit planning.
‘Our observation in working with our clients has been that if we can help you get very focused on the key drivers of revenue and profit, that provides real focus around the strategies required to grow business value. Would you like me to explain how we might do that?’
You then step into a series of questions to help the client understand the potential. We like to start with the number of customers. Quite simply:
‘Tell me, how many active customers do you have right now?’
Most clients will not know. Some will have an idea. Often, if you are at the client’s premises or have access to the client’s accounting system, you can run a sales report by customer to get an approximation. Do not overanalyze. You are looking for numbers that are close enough to work with.
Next, move onto average revenue per customer. This number is often the critical one. You can likely calculate this number in advance if you have access to the client’s accounting system.
Next, ask the client what proportion of customers they typically lose during the year. Again, an approximation is fine. If the client has no idea, suggest that it’s your experience that where there is no focused retention program in place, businesses tend to lose between 10 and 20% of customers, so work with 10%.
Now move to new customers. How many enquiries does the client receive each month? And what is the conversion rate? Often clients will overestimate this number so this is a good opportunity to pre-frame for the client that as you start to work together more closely, you will help them implement a measurement system so that they know exactly what the numbers are.
PANALITIX’s GrowthEquation provides a step by step approach to asking these questions, gathering the information and taking your client through a high level planning exercise to uncover what is possible in terms of revenue, profit and enterprise value in their business. And importantly, you can demonstrate to them exactly where they should focus to achieve the maximum impact; after all, most business owners do not have the time to do everything. Then, very importantly, GrowthEquation serves up intelligent content to assist you in implementing a project to help the client achieve the goals they set. You’ll access best practices, diagnostics, methodologies, tools and other background reading to either share with the client, refer to as you implement a project with the client or use as training content internally. This helps your firm take major strides to become a better business advisor.
As an accountant, numbers are your strength. Stay close to them. You have instant credibility in any numbers based discussion and you can add serious value to the client by opening their eyes to the business improvement opportunities using this approach. To see how GrowthEquation and its associated content can become an important part of your business advisory toolbox, book a demo here.
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