A major capital investment may seem like a no-brainer, but it will change your organization in ways you need to consider before signing the purchase order.
This concept is very closely tied to your cash flow statement. Simply put, the financial gap is the amount of cash you will need to cover increased costs as you grow. (After all, growth is the point of automation.) Every business has a financial gap – you just need to know what yours is, and in order to do that, you must have a cash flow statement.
Think of it as driving a bigger, gas-guzzling car. You’re going to need to fill up more often. Your growth creates a “cash-guzzler” and the financial gap is the calculation that tells you how much more fuel you need and how often you will need to fill up. The financial gap determines how fast you can safely grow your business without running out of cash. If you grow blindly, you will exceed your resources. It’s a type of financial mismanagement and it’s one of the most common reasons young businesses fail.
Your bookkeeper is not going to be able to help you on this. Calculating the financial gap is best done by a competent certified public accountant (CPA). It’s not a commonly performed calculation, yet it’s one of the most valuable key performance indicators (KPIs) to your success.
Lesson #3: Know Your Customer Acquisition Cost (CAC)
The third lesson relates to the cost of bringing on new customers. When you blow past all of your family, friends, and referrals, it becomes expensive to get new clients. This is almost never considered until it is too late. These costs can be substantial and can literally strip away any profit a new customer brings.
Fortunately, in today’s digital economy, we have the ability to determine these costs fairly easily. If you are using any kind of online advertising like Facebook, Google Adwords, Display Network, and so forth, you can easily track the costs. If you spend $1000 a month and bring on five new customers, your CAC will be $200 per customer.
The important thing about this number is how it relates to your gross margin (the amount of money above the cost of material and inbound freight for the customer order).
If your gross margin is typically 33 percent, each new customer will need to be worth more than $600 for you to have any additional available cash.
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