This Exercise Will Change EVERYTHING in Your Business
As a business coach, I have witnessed far too many owners mindlessly go through the motions, without ever taking a step back to look at their operations from a bird’s eye. This results in higher expenses, lower sales revenue, and thin profit margins.
There is 1 simple exercise you can do that will help you gain clarity around your business activities, plan accordingly, and make you more profitable. It’s called a ROI analysis.
ROI stands for return on investment. Let’s analyze the return on your investment in 3 different facets of your business:
1) Return on time
Think of all the busywork you do that does not generate revenue such as bookkeeping, driving, calls and emails, writing (blogging or advertisements), and social media management. Imagine if you could offload those tasks and focus on leading the company. Make a list of all the tasks that need to be completed across the company. List the time spent on each of those activities. Then list the sales generated by those tasks as well. Divide the revenue earned by the time spent. The lowest numbers are the low-return tasks. Which of these could you delegate, outsource, or stop doing? Which of these can you afford to outsource? You can find freelancers and the going rate on Upwork or Fiverr. If you need to hire another employee, which tasks will that new person take? Sit down with your team and identify which tasks they would enjoy doing and divvy out the delegation list that way. This will clear your plate and help you prioritize tasks effectively so you can focus on being a visionary leader.
2) Return on client
You’ve probably heard of the 80/20 rule but are you actually implementing it? Pareto’s Rule indicates 80% of your profits will come from 20% of your customers. So it’s important you identify which customers are generating the highest ROI. Divide the sales revenue earned from client A by the time spent on client A. Continue to do this for each client and then rank the results. You could hand-off the low ROI clients to another employee or allocate less time and resources to those clients. Make a list of the pros and cons of each client in terms of how much you enjoy working with them. Are they benefiting from your service? Do they pay their invoices on time? Are they rude? Compare this to their ROI. What similarities do you notice between the high ROI clients? Based on this, identify your ideal client. When you consider on-boarding a new customer, compare their characteristics to your ideal client. Are they a good fit? If not, how much time will you spend with them? Tailor all of your communications, advertisements, and contracts to speak to your ideal client. By focusing on your top 20% clients and wasting less time, your business will become more efficient and profitable.
3) Return on product/service
Again, probably 80% of your revenue comes from 20% of your products or services so it’s important you analyze the individual return on each service. Divide your revenue earned from service A by the time spent + input costs for service A. For example, I would need to determine whether my 1:1 coaching, business consulting, or speaking engagements are most profitable. Not only do speaking engagements take time, it also involves travel expenses, so I would take that into account during my analysis. This helps tremendously when launching new products and services, re-pricing, and scheduling. I could create a spin-off of my most profitable service. I could decide to raise my prices for the lowest ROI service. If I have to choose between a client meeting or a speaking engagement, it’s easier to make that decision when I know which item will bring in more money.
When you complete a ROI analysis on your time, clients, and products/services, you are able to prioritize and allocate resources in a more efficient manner. Less time spent, as well as more offerings of a profitable service, means increased profit margins!
P.S. My clients get access to a tool that does this analysis for them and forecasts their revenue so if you have any interest in that and are ready to become more profitable, let’s hop on a complimentary consultation call!