Myth: A Positive Marketing ROI Will directly translate to scalability.
Remember earlier when I mentioned time and price are both important factors?
If you spend 100 on your marketing today and it takes you a year to make it back, how will you finance your business as it expands? A loan? We would consider that an inefficient investment.
Yes, spending money on your business is an investment. Business owners that do not know when to expect money to come and go are usually operating on a fulfillment first business model. Which means they will be prone to the risk of not getting paid which leads to inconsistent sales and a ton of frustration.
You may be inclined to think “If I spend money it will come back like it did in the past. I don’t care how long it takes as long as I'm making more than I spend.” But are you considering Profit Vs Cash Flow.
Fact: Knowing How Long it takes to recoup your marketing investments is the number one predictor of scalability.
The reality is if you fulfill your services before getting paid, you have to wait to get paid. You can’t reinvest money into your business until payments clear your account so you will need to have higher than normal cash reserves. You also won’t be able to take profit distributions until the payments are clear.
If you want more efficient sales and healthier cash flow, you may decide to move to a paid up front model. This is because the success of your business depends on generating consistent revenue. But how do you define consistency in your business?
Knowing how much money your business is going to earn and when it is going to earn it is of the utmost importance. That has everything to do with the next formula we are going to explore:
(Cost of Sales + Cost of Marketing)/# of New Customers Acquired = CAC
The key here is to know your customer acquisition cost. The sooner you know that the better. Once you understand your customer acquisition cost you can answer 3 all important questions:
1. What is your CAC?
2. On average, how long does it take until the gross profit earned from a customer is greater than your CAC?
3. How fast can you acquire customers (customers/month or customers/week)?
Once you answer those 3 questions you will be able to predict your cash inflows with a satisfying degree of accuracy. If you’d like to learn how our professionals here at Your Big Bank can help you determine the scalability of your business and the health of your cash flow...
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