When cutting expenses where should you start? That is a great question. The problem is often business owners and managers don't have the right information to make these cuts. So, they arbitarily cut without understanding the effect of their cuts on the revenue engine.
Case and point many companies cut marketing because that seems to be one place they are spending a lot of money. But, what is the effect of cutting marketing? A decrease in leads. This in a time when the number of leads that it takes to create a new sale is going up. The results: an even bigger drop in sales ultimately putting the business in an even more difficult financail position.
So, what do you do? Monitor the right metrics for your business that allow you to see cause and effect. Identifying these metrics can be time consuming and difficult. Here is a list of critical values you should be tracking no matter what business you are in:
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Operations
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Sales
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Marketing
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· Total Revenue for Period
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· Close Percentage
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· Leads per month
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· Maximum Capacity for Your Business
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· Number of Sales per Month
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· Amount of time spent marketing
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· Total Revenue Generated at Maximum Capacity
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· Average Revenue Per Sale
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· Current $$$ spent on marketing per month
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· Cost to Add More Operational Resources
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· Cost to Add More Sales Resources
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· Cost to Add More Marketing Resources
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If you don't currently know these numbers for your business consider it a red flag. Your business is at risk and you may not even realize it!
Once you have these numbers, analyze your revenue engine from the back to front of the cycle identifying choke points along the way. First, make sure you have set a revenue goal for the year. Then determine if you can get there from your current position.
Review you operations to verify the maximum revenue you can generate with your current resources. Compare this number to your revenue goal. If you cannot meet the goal you may need to add capacity. So, what will it cost you to add more capacity when needed?
Next, review what level of sales you require to meet your revenue target. Again, do you have the sales resources needed to support the sales goal? If not, what will it cost you to add sales capacity to meet your goal?
Finally, look at how much marketing is needed to generate the leads to support the sales efforts. If your current marketing cannot support the goal, what will it take to improve your marketing, or cost you to add enough marketing support to reach the goal?
Using this approach helps you more effectively set and prioritize the right objectives for your business. You will find that it will help you make the correct cutbacks and strategically focus on the right activities that provide real revenue impact. Over time you will work toward profitable revenue growth.
For more information about this process visit the revenue engine area of our web site.