Small Business Financial Models - Key to Success

27 Feb

Small Business Financial Models - Key to Success


I've had the opportunity recently to do some small business consulting. Like many small businesses, this small biz was looking for more effective ways to market itself. We began with the obvious online channels - a website and blog. We began a search engine marketing campaign using Google Adwords to get a feel for what keywords his ideal customer was typing into Google to find him.

As we began looking at the metrics ( the number of clicks or visitors driven to his website, the conversion rate of his website, his closing ratio etc), I realized there were deeper issues.

"How much does it cost you to service this customer", I asked? He didn't know. Our conversation then migrated into a discussion about his financial metrics. I asked him about his financial model - he didn't have one. It became clear to me (and him) that if we don't know what it costs to service an incremental customer, we don't know how much we'd be willing to PAY for a new one! This is where LTV ( life time value) comes into play. Wow! It was like a light went on. He said, " I need to understand these details - I don't know what I don't know".

I've seen this pattern over and over again. Small businesses tend to focus on new business and at the same time, they ignore the financial details of their current business. You need to do both. This is why shiny new marketing toys are so attractive.

Businesses increase in value as predictability increases. How will your business scale? What is the effect of adding 10 more customers? How will your costs increase? If you could be profitable with less customers why wouldn't you do that?? It's all about your financial model. It should describe all those scenarios and allow you to test hypothetical situations.

Look at the priorities of your business - you don't know what you don't know. If you don't have a financial model - build one ASAP!

Update on Monday, March 7, 2011 at 05:17PM by John Boudreau

Hello All - I had a reader ask the following question:

"Hello, I was wondering if you could send me the financial model you developed in relation to google adwords. I'd like to see your vision and develop my own financial model for my firms website"

Here you go - you can download it by going here