THIS Equation Will Turn Your Business into a Money MACHINE!

So the first KPI that I want you to track is how quickly you can recover the cost of startup. That startup capital goes into business to get it off the ground. That investment that you put in, how quickly can you retrieve and get that money back? Does it take three months? Does it take six months? Does it take 12 months? The bottom line is if I put $50,000 into the business and I dig myself in that $50,000 hole, how long does it take for me to get back to zero? That is extremely important. How fast can I get my money back out of the deal? Now, if you go into debt going and spending $50,000 in cash, you might actually be able to get away with putting $10,000 of cash into the business, leveraging, getting debt on the other $40,000. And therefore you might have monthly payments on the $40,000 worth of debt, but you're able to get out of that small $10,000 hole of startup cost very quickly. So leverage allows you to improve this KPI a lot. And remember, KPIs don't tell the whole story because you have a monthly payment. Loans and leverage definitely add to the risk of your startup. However, this KPI can be massively improved by getting can recoup the cost of capital and the cash that is required to get started. And here's the thing, when you're really trying to scale up, if I can go start five locations because I only have to put $10,000 down instead of $50,000 and I use leverage on the other 80% of the deal, I could literally go get started five locations or five businesses instead of one simply by making sure that I am taking a loan and get using leverage in the business. Now, 20% down is pretty standard for a lot of business loans. And if you go to the SBA, you might actually get 10% down, which means for $5,000 down, I get 50,000 dol, $50,000 worth of leverage. And again, I'm going to have my monthly payment, but I'll be able to improve this KPI. This performance indicator of how quickly I can recoup the capital that it takes to invest and get the business off the ground.

The next KPI in the perfect business is your close ratio. And in the perfect business, the close ratio is extremely high. While you are growing, I don't want your close ratio to be super high when you're trying to maximize profit. Because if you're closing 90, 95% of the deals and the proposals that you send out to customers, it pot means you're Leaving money on the table. Because if you'd raise your prices, you'd be able to get more profit margin even though your close ratio is low. But your close ratio is something you should be tracking. It's a key performance indicator simply because it's the best measurement of demand and supply in the market. If demand is really high and supply and other contractors and other businesses that are offering your service or products is low, you should be charging a higher price. And if demand is really high and supply is really low, your close ratio will probably be really, really high, like 80, 90%. And in that case, you either A grow and continue exp. Grow the business or B you raise prices. In my opinion, there is no in between. You either are growing your business by having a high close ratio or B you increase prices, increase your profit margins and slow down the rate of growth. And by raising your prices, you bring equilibrium of supply and demand down. At Augusta Lawn Care, we really shoot for 70 plus close ratio. If somebody is just getting started and in hyper growth mode and we actually want them under 50% close ratio if they're trying to maximize profit. If someone's running out of cash, growing really fast and they're 89%, 90% close ratio, I will actually tell them raise your prices to the point until your close ratio is under 50%, which might means raising your prices by 20, 30, 40%. But that that margin, that extra revenue that you create is literally straight profit simply because raising your price is a massive lever in the business that literally pumps money directly to the bottom line. In my opinion, close ratio is the best determining factor of whether a company is in growth mode or in profitability mode and maximizing for the most margin or trying to maximize the number of customers that they are bringing in the door. Now, close ratio for service based businesses. But when it comes to product based businesses, you can look at things like conversion rate when it comes to people that actually put things in their checkout in an online shopping cart and how many of them actually continue with the transaction. When it comes to service based businesses, if someone is struggling with cash flow and they're also telling me they have so much work they don't know what to do with this is like the number one thing I'm talking about is you need to raise your prices to bring down your close ratio. Your close ratio should not be at 80, 90%. If you're struggling on cash and you have tons of leads lining up and you have, you can't even get back to all the work, it's Come coming in the door.

The next KPI is cac, or customer acquisition cost. And customer acquisition cost is simply the amount of money that I need to spend in order to get one customer. It's very simple. I take your total marketing or advertising spend, I divide it by the number of new customers that you bring in the door. That is going to be your customer acquisition cost. Now, this should not be confused with your cost per lead, because a lead has not yet become a customer. If you take your cost per lead and you divide that buyer close ratio, you'll typically come up with with your customer acquisition cost. Because the close ratio is the determining factor of how many people do I turn from a lead into a customer. Now, customer acquisition cost is extremely important. It's going to be the determining factor in this perfect business, how quickly and efficiently you can scale up. Because if you have really high customer acquisition cost, you're going to burn so much capital and it's going to take you so long to recoup the cost of acquisition that you'll never be able to scale efficiently. For example, if I have to spend $400 in order to acquire one customer for mowing, and every single week I mow the lawn for $40. So I got $400 customer acquisition cost, $40 per cut. And let's just assume that I have a 25% profit margin business. That means on $40 cut, I have $10 of profit. In other words, I'm going to have to mow this lawn 40 times. That's 400 divided by $10 of profit per cut. I'm going to mow this lawn 40 times before I ever even get out of the hole and make up the cost of acquisition. Therefore, I could literally mow this person's lawn for a year, a year and a half, before I ever actually make a profit. Profit on the customer. That's extremely difficult. And this goes back to looking at every single customer, kind of like that first KPI that we talked about, and that is getting your business started like the startup capital and recouping. That same thing goes for customer acquisition costs. A very efficient customer acquisition model is one where you pay very little or nothing for customer acquisition and immediately are profitable. And there's software companies that are literally willing to spend two or three years worth of revenue, the annual value of a customer. They're willing to spend two or three times that on just customer acquisition costs. That's incredible. But typically they will lose money because any model where it takes two or three years to recoup the Cost of acquisition is typically not a business that can grow very quickly or sustainably, because what you want is I get that customer for $10, I spend $10 on marketing. I'm able to get one customer. So if I paid $5 as my CPO, my cost per lead, and I have a 50% close ratio, that would mean that I have a $10 customer acquisition cost. Now, in that same model, if I'm mowing lawn for $40, same price, same profit margin, 25%, literally, in one mowing service, I'm able to recoup the cost of acquisition, which means in a week or two, literally one or two weeks, I'm able to recoup the cost of acquiring that customer. The reason that CAC is so important is simply due to the fact that the enterprise value of the business is simply determined by this equation. Money in customer acquisition cost and money out return on investment. How much money does it take to get a customer, and how much on average do I get in profit from that customer? If that model can be very efficient, where the customer acquisition cost is very low and very quickly recuperated, that isn't a very, very efficient model for business and a very efficient use of capital where investors want to spend money. And your enterprise value is going to be very high because you have a predictable low customer acquisition cost with a predictable outcome that within a matter of week, two weeks, a month, very short amount of time, you're able to recoup that money and then take the capital and the cash that you get from that customer after that and pump it right back into growth. So now, after that first lawn mowing service of $10, that I recoup my customer acquisition cost. Now every single time I go to that customer's house, I'm getting $10 in profit in my pocket, in and above the customer acquisition cost, which now I can take that money and go buy another customer, which means every single cut, I could theoretically take the $10 of profit, pump it right back into customer acquisition cost, and get another customer out the other side and that customer $10 in profit, every single cut. So the faster I'm able to recoup my customer acquisition cost, the more efficient my business is. That model of cash in customer acquisition cost in and return out a customer on the other side, the more efficient that model is, the more valuable your business is.

And that ties in the next KPI, which is lifetime value. Because if I spend $10 on customer acquisition cost, the ROI is really going to be determined on how much is that customer worth to my business in their lifetime. For example, If I get $10 of profit on every single lawn service and I'm able to recoup the cost of acquisition after one service, how many services on average, the lifetime of the customer am I going to be able to make in profit? Let's say on average, I'm able to mow that person on 100 times. That means that I spent $10 on customer acquisition cost money coming in into my box, my business that I built, my system that I've built, and if I can return 100 on average cuts for that customer at $10 per cut in profit, I literally turned $10 into $1,000. I just had a business that was able to produce 100x by simply figuring out the systems, by putting $10 of customer acquisition cost in and $1000 out on the other side. But that is all determined by lifetime value. How long do I keep a customer? How many years, how many months, how many weeks? And then how much do I make from them? On every one of those date periods, Most of the time measured in years, you can say, okay, if that customer is going to stay with me for five years on average, and I'm going to do 20 cuts on average per year, that would be 100 cuts that I'm going to be able to keep them. And if I know I make a profit of $10 per cut, there's my equation. $10 in, $1,000 in profit out. That's a very efficient machine that is worth something. That black box that we call a business with the systems to make that equation work is what you have value. You've created a business. Having trucks and equipment and a fancy office does not make a business, does not create any value. You simply may turn cash on your balance sheet into like a truck or a piece of equipment. What creates real value is when you can put customer acquisition cost in and return on investment out. And when you figure out those numbers using lifetime value to calculate what the return is on that customer acquisition cost, you have nailed the game. And that's really where the valuation mechanism and enterprise value of your company begins to skyrocket.

So the next KPI is actually going to be the thing that determines how large your business will grow in revenue before it actually begins to plateau. Because there's this unforeseen thing that just constantly eats away at small businesses, erodes a small business. It's called attrition. It's like the little bug that eats through the bark of a tree, eats it from the inside out. All of a sudden the tree dies. Now what happens in a small business? It's growing, everything looks healthy, and all of a sudden, business starts to plateau. The revenue growth stops happening. What is causing that? It is attrition. And you can actually numerically find out where exactly your monthly or annual revenue is going to be before your business begins to plateau. How do you do this? You take the amount of new revenue that you get on a monthly or annual basis and divide that by the percentage of attrition. Now, what that means is attrition is simply the of customers that you lose every single month. Let's say, for example, you have $10,000 in new revenue coming in the door every single day. Now, if you're having a 10% attrition, which means 10% of your customers are leaving every single month, well, that is $10,000 divided by 10%, which is 100,000. Now, what that means is that $100,000, when you hit that in monthly revenue, your attrition, $10,000, which is 10%, is going to equal the amount of new revenue you're getting every month, which is also $10,000. So you know in the next month, what's going to happen you, thousand dollars more in New revenue? We are also going to lose 10% of 100,000, which is 10,000. So you're going to break even. You're not going to grow anymore. So you can actually predict using your attrition rate, exactly how big your business will grow before it stops growing. There's two ways to break out of this vicious cycle of plateauing, and that is either a, you Increase new revenue, I.e. market more, advertise more, make a better brand for yourself, be able to get a better customer acquisition cost so that when you spend more money on advertising, you generate more revenue. So either A, you have to work on the top part of that equation, which is increase new revenue, or secondly, you can improve the denominator or your attrition. And how do you do that? How do you improve attrition? You have better customer service. You make sure that you try to get customers to come back to your service after they've left. These are the only two numbers you need to know in order to know exactly how big your business will be before that little bug starts to appear and your business stops growing. If you know all those key performance indicators in your business, right from startup all the way, the lifetime value and churn of your customers, and if you can constantly be refined and improving and adjusting and making them better, you will beginning to work on the system of your business. That black box is all that I care about. Make it better, improve it, tweak the gears, grease it, make it more and more efficient so that this one equation works well and that is customer acquisition cost in and ROI and return that customer out. Constantly Improve that box your business by improving the systems and making sure all these key performance indicators, these little gears, these little things inside that box are working well oiled to ensure that your small business is a money making machine. Watch this video here where I talk more about close ratio. Because the only thing you need to know if you're building a business from 0 to 500,000 in annual revenue.