More About Being A Bean Counter

Last week we talked about calculating a return on investment (ROI) from your recruiting costs, whether you are recruiting customers for your product or resellers.  Of course our return on investment calculation is just an estimate based on less than all the facts.  It is still an important calculation, though, and worth the exercise even if ultimately it is way off.  Why?  Because ultimately you want to know what your real return on investment is and you can’t wait for all the facts to come in.  So, you make an estimate based on what you believe, then you revise your number as reality sets in.

Why do you even care what return on investment is?  Return on investment is an important measurement for deciding if you time and money are being spent in the right way.  As a rule of thumb, a 20% return on investment is good for investments with substantial risks.  You can consider a business investment a substantial risk because there will be good times and bad times, and you might now be in a good time (in fact I think now is a great time).  So today your real ROI may be 20% and tomorrow it might be -5%.  So 20% is a good rule of thumb for ROI.

You might want to adjust this ROI for your risk level.  Let’s say that your ROI for new resellers is 18% but it’s likely their business will grow.  So 18% may be a very good ROI.  If your ROI is 8% instead, it might be a good ROI if your investment is US Treasuries that will always pay 8% (i.e. ultra safe).  But it would be an extremely poor ROI if your investment had any risk at all.  So risk is a factor in whether your ROI is a good number or not.

Your ROI is an important number to determine how much money you’ll need before your business begins making a profit.  For instance, you invest $100 per month for a year and your ROI is 20%, meaning you’ll make $20 per month or so.  It will take 5 years to begin making a profit if you never increase your investment.  If instead you sink your profits back into your business, you will earn $100 in revenue before hitting the 5 year mark but you’ll always lose $1200 per year.  You’ll need to back off on your investment to earn a profit.

If you do want to invest $100 per month in your business and reinvest the revenues for 5 years, how much money will you need?  $1200 per year X 5 years or $6000.  Do you have $6000 or can you get it over 5 years?  If not, you will need to borrow the money or find investors.  So the ROI is also important to determine if you’ll do it all by yourself or if you’ll need to seek help from others.  It’ll do this before you actually need the money, giving you time to work with your bank or pitching your relatives on your new business (to drum up investors).

So your return on investment number is important to estimate, then correct, as you initially grow your business.  What other calculations are important?

Generating Activity

If you are new to business, the first thing you need to know is that you can’t sell anything.  You can’t.  Approach your mom with a new product to sell her and she’s going to be skeptical.  So how do you sell if you can’t sell?  I mean because, come on, you can’t start a business and sell nothing right?  Actually, you can start a business and sell nothing as long as eventually you will sell and have a profit.  Take facebook and twitter for example.  No initial product, no advertising platform, but they were definitely “for profit” businesses that made zero sales and zero profits.  Their initial goal was to create traffic for their websites by providing value to their users.  Users are not customers because they don’t buy anything, they just use their services for free.  From the traffic, or eye balls, eventually facebook and twitter started using paid advertisements to generate income.  Don’t think either one is profitable yet though.

Similarly to facebook and twitter, your initial goal when you start a business is to generate activity.  What this may mean is that you give yourself (time), your materials, your samples, or your products away for free or at cost (no profit) until you generate some interest.  Our big break this week came from a free stuff site that we got listed on, where we offered to give away free samples with a catalog request.  This generated tons of interest and, truth be told, we are selling almost no product.  But we will get our materials in front of people who will hopefully end up buying.  Not all of them, but some of them will.

I know what you’re saying… “I can’t afford to give away so much without selling!”  I tell you what, you really won’t sell until you give away something.  People are just too skeptical of sales offers, they need something to dream with or to try.  And they need a pressure-free environment in which to make a decision.  If you keep bugging people they will never buy, because they will feel too much pressure.  So the best thing to do is to give them sales literature and samples, and let them get back to you with an order.  Eventually you’ll probably want to follow up, and you may want to ask for the order, but you want to try to do all of this without pressure.

Your best customers will ultimately buy from you because you give freely of yourself to them.  You are not there to sell to them as much as you are to help them through the process.  If you are the guy or girl they can go to and are satisfied with your service, price will not be an issue.  So make sure to always serve your customer to the best of your ability.

So you want to generate activity by giving of yourself and your materials, but of course you need to budget for this.  Realizing that your budget is too small for what you need to do is important, but not always because you need to fit your expenses within your budget.  More often, you need to expand your budget by coming up with money from investors or from the bank.  This is when you really need to sell, and you need to get your facts straight.  Most of the time, investors want to know what kind of return they will get.  How do you know what the return will be if you aren’t selling?  Guess like crazy.  Use your imagination to figure out what your business ultimately looks like and communicate that to potential investors.

A good problem to have is too much activity, and probably not enough sales.  Be ready for it!