Thursday, March 31, 2011

How cash flow, appointments and leads correlate

I was talking to a guy who pitches vending machines today, soda and snack machines. Not Coke or Pepsi, but alternative machines with healthier snacks and options for energy drinks and such. I say pitch because for the business, there's no cost. This guy's company places the machine at your business and they maintain the machines and keep the profits.
As Mr. Snack Machine was leaving, I noticed he was driving an Audi A8. Nice car, but expensive. In looking at his marketing materials, I noticed the address on his business card looked like a nearby residential address. So, for fun, I looked it up on Zillow. $625,000. Let's say he was one of the few that put 20% down when he bought his house and guesstimate his mortgage at around $3,800 per month (incl. taxes & insurance). Now let's say Mr. Snack Machine got a great deal on the A8 at $40,000 and put that monthly payment around $800. A total of $4,600 between the two.
I don't know where I got it from, but I always say, “You gotta sell a lot of cups of coffee to pay the rent on a coffee shop.” Out of curiosity I decided to figure out not only how many snack machines Mr. Snack Machine had to place, but how many leads he needs just to pay for his car and house. For simplicity, we'll ignore the other bills or let's say Mrs. Snack Machine's income covers them.
So I did some research on the interwebs and see that an average snack machine costs $3,000 and grosses an average of $500 per month (after snack costs). He probably finances multiple machines at maybe 3 years for a monthly payment around $94 each. Mr. Snack Machine said they service the machines weekly, so I estimate about $20 per month per machine for the employee. $500 gross less loan and payroll leaves a net cash flow of $386 per machine. Notice, I'm not concerned with accounting profit right now, profit doesn't pay bills, cash does. At $386 net per machine, Mr. Snack Machine needs to place 13 units to pay for his A8 and McMansion.
On the face of it, 13 units doesn't sound all that bad, right? Place a couple of machines a week and you are there in no time. But, let's take it a step further. Assuming Mr. Snack Machine's close rate is 1 in 20 (not a bad rate for this type of sales) or 5%, he needs 260 appointments to place those 13 units. That's finding 260 business decision makers willing to meet with him. Again, going with 1 lead in 20 being willing to meet with him, he needs to develop 5,200 leads! That's 5,200 business decision makers with a company big enough to support a snack machine! AND, that's just to pay for his car and house, nothing else.
I'm not saying Mr. Snack Machine should quit, once he gets the revenue stream up and running, it can be a profitable business. My point was to simply walk you through the thought process of tying leads to how much cash flow you need. As a business owner you should always be thinking about cash flow. No matter what business you have (aside from government contractors), you should be able to start at how much cash you need and back into how many people you need to touch in your market. If Mr. Snack Machine wants to double his income, he better start thinking real quick about how he can get 10,400 (quality) leads instead of 5,200.
It doesn't matter if you are an author, artist, widget maker, app developer, or whatever, you should be able to walk through this same process for your business. If you've got questions, leave a comment or send me an e-mail. I can also send you the spreadsheet I used to do the rough calculations. Send me an e-mail and I'll send it to you.