This business coaching post originally appears as a guest blog for Practice Pay Solutions eUniversity:
As an entrepreneur, you face many decisions that do not have clear-cut answers.
Should you discount your prices and under what circumstances? Should you say Yes to a client that is less-than-ideal? Should you pursue the big client with a long sales cycle or the small client with a lower purchase point?
Many decisions ideally depend on your particular business situation. It might make sense to discount to test a lower price point but not if your business brands itself as a premium service. It might make sense to say Yes to less-than-ideal clients if it means that you sustain your business long enough to build your ideal client base (but you will have less time and energy for ideal clients that do come along). It might make sense to prioritize the big clients with long sales cycles but you might run out of cash (yet, if you prioritize the small clients you might have cash and then be hard-pressed to grow your revenues).
If the best answer for YOU is that it depends on your business, then key answers are revealed when you get to know your business. Here are 7 insights you can get by looking at your business data:
1. Burn rate
Your burn rate is your average monthly costs. Unless you have a day job or spouse to cover your living expenses, you should include living expenses in your burn rate. Along with your cash position, knowing your burn rate allows you to calculate how long you can wait for your first sale. You might not be able to wait for the big clients initially until you build a larger cash position.
2. Time to sell by client
If you are already in business, look at past sales and how long it takes for you to land clients. Maybe that big client isn’t that slow to close relative to your average sale, and it’s worth waiting.
3. Time to collect
Calculate the time from when you make a sale to when you collect the revenue. Compare this to your current cash needs. This tells you how long it takes for sales to convert to cash. If it’s longer than you’d like, you might offer an early-pay discount
4. Cumulative revenues by date
If you order your sales by date and see how your revenues accumulate over time, you can see what months, quarters or seasons are better for sales. Plan your sales and marketing according to the rhythms of your own business. Save your operations, finance and back office projects for the slow season. Save your discounts for the slow season.
5. Revenues by client
Know what each client contributes to your total sales. If a single client accounts for the majority of revenues, you are exposed to that client and may want to prioritize diversifying your client base. If that client is less-than-ideal, you might want to let them go, but only when you can absorb the loss with new business.
6. Cumulative revenues by client
If you order your clients by how much they purchase, from largest to smallest, you can calculate what percentage of cumulative revenues each subsequent client contributes. Many businesses find that their top-grossing clients account for a disproportionately high share of the overall revenue (Pareto’s Principle says that 80% of income is generated by just 20% of a population, and this 80/20 phenomenon has been noticed in other population measures). If 80% of your revenue is generated by 20% of your clients, then you might want to rethink how you manage these relationships – how you define who is ideal, how you dole out discounts or other incentives, how you spend your time.
7. Year over year calculations
How do the above measures look year-over-year? Are your key clients getting more dominant or are you diversifying? Is there really a seasonal pattern to your business or were the fluctuations more ad hoc? Are you improving your collections, shrinking your sales cycle, and otherwise improving how you run your business in a way that benefits your bottom line?
Getting to know your own business data is one way you can make better decisions about pricing, time management, client service and overall business strategy. I cover two more ways you can make better business decisions in my upcoming webinar for Practice Pay Solutions on July 30: Revenue Now Or Later: What Opportunities to Pursue and When