It’s easy to get stuck in the past when you’re building a financial model for your small business. After all, you already have data on what you’ve accomplished and how much you’ve invested in areas like marketing and payroll.
But only looking in the rearview mirror won’t take you to where you need to go and it certainly won’t deliver the best forecast. Ideally, you need to understand where you’ve been while also looking out the windshield ahead to propel your business into growth mode.
That means it’s important to know which levers to pull to multiply your revenue and profits in the future. Take a look at factors like visits to your website, conversion rates and repeat purchases as you build your model and determine what is attainable for your small business.
Whether you are hoping to attract bank funding, an outside investor, or wanting to grow organically, developing a sound model based on past and future information will give you the keys to accelerate your growth.
Use these simple, effective tips to nail your small business financial model:
Think Like a Puppeteer
The first step to creating a winning business model is to understand what drives your revenue. Keeping accurate data on the efforts you make to drive sales is a key part of understanding which strings to pull in your business to achieve the best results.
Are you constantly keeping track of visits to your website—and whether they lead to customer acquisition? Are you collecting data on conversion rates from your various marketing efforts and repeat purchases by your customers? Are you analyzing data on how various demographic groups of your customers behave? Are you looking at how profitable it is to sell each product or service you offer?
It’s important to set up systems to track the correct data points or you won’t be able to figure out what really drives your growth. By having insights into where your revenue is coming from, it makes it much simpler to develop a sound financial model and gives you the ability to pull the right levers to achieve your business goals.
Geek Out On the Numbers
At first, you may find all of the data you are collecting a bit overwhelming. Once you start to analyze it, though, you may begin to find some fascinating trends. Often, there are big surprises. You may find that different factors are driving your revenue and profits than you expected. For instance, maybe your business is driving the bulk of sales through your website or maybe it’s from your email marketing efforts, through personalized email campaigns.
Instead of poring over reams of spreadsheets — who has the time? — use the dashboard within your CRM to track key metrics that may highlight interesting patterns between your marketing activities and closed sales.
Rethink Your Target Market
Once you can see the true connections between your marketing efforts and increase in your revenue and profits, it will be easier to come up with a business model that will allow for exciting future growth. You’ll also be able to see which activities you should discontinue, so you can focus more time and resources on those that help you grow.
In the early days of running a business, it often makes sense to work with almost anyone who will do business with you, so you have some cash flowing in. Once you take a close look at your data, you’ll probably want to narrow your target market. For instance, you may want to stop marketing to customers who tend to only buy from you when you are offering deep discounts and focus more on cultivating repeat business with customers who are willing to pay full price. If you can find a successful way to do more of your business with your more profitable, raving customers, you’ll be able to come up with a more attractive business model.
Keep Experimenting
Just because a potential driver of your business hasn’t panned out this time, that doesn’t mean it never will. Let’s say you’ve taken out an advertisement in a local magazine to offer potential customer a free consultation, but no one is biting. Perhaps running the same ad on your website, in a relevant publication online or advertising it in your emal newsletter will result in a better response. You’ll never know until you test different approaches.
Keep experimenting with the different levers of your business—and track the results—until you are clear on what business model works best for you. Once you really know what sales and marketing strategies will drive your future growth, you’ll be able to plug them into your financial spreadsheets and create future projections in a more logical way.
But even when you reach that point, don’t stop experimenting. Your business and market conditions aren’t static. You never know when you’ll discover a brand new way to increase your revenue and profits dramatically—and need to weave it into your fast-evolving business model.
Growing your small business requires planning. The most reliable way to forecast the future is to try to understand the the past and the present. By creating a rock solid financial model, you’ll propel your business into the fast lane and ensure you are pushing all the right buttons.