How many clients do I need?
That’s the million dollar question many business owners want to know the answer to. How many clients do I need to break even? How many clients do I need to be successful? In this post, I’m going to give you a step by step formula for working out exactly how many clients you need.
This post contains general advice only and should not be taken as specific advice suitable for your business. You should always consult your accountant or financial advisor for specific financial information
Step 1 — What is your goal?
Setting goals in any pursuit of success is the important first step. You need to know where you’re going before you can work out how to get there. If you set off on a car trip to your holiday destination, but you don’t know where the holiday resort is, you’re going to struggle to know whether to turn left or right at the first intersection!
Business goals need to be specific to your business. Sometimes goals can be arbitrarily set based on what someone else has achieved. Or what you think you should be achieving, rather than what you want or need, considering all the specific circumstances which relate to you and your business.
We’re not going to go into the specifics of goal setting here today. You can learn more about goal setting in this previous post.
What you want or what you need?
The difference between what you want and what you need is significant. I encourage you to think about both scenarios but be clear on the difference.
A want is something you would like to have. These are you long term goals. Think of your dream business. Think about the impact you want to make in the future or the goal profit you’d like to achieve.
A need is something you require to survive. In a new business, this is your breakeven point. As your business matures, this is the point at which you can cover all your business expenses and pay yourself the salary you need to live on.
One of the main differences between your wants and needs is the time frame. It’s important to focus on your needs in the short term but not lose focus on your wants as long term goals. Both are important.
When you’re setting your goals for this exercise, make sure you know whether you’re calculating for a want or a need. The result will be very different.
Step 2 — What is the time frame?
For this exercise, you need to choose a time frame attached to your goal. Would you like to calculate how many clients you need per year? Per six months? Per quarter? For all subsequent steps, be sure to keep the time frame consistent.
When you consider your time frame for this exercise, it’s wise to make it relative to your business model. If you have a monthly membership based model, then you might like to do all your calculations for a one month period. If your business model is based on one off purchases, you might like to use a full financial year.
Step 3 — What are your business expenses?
To calculate how many clients you need to achieve your goal in Step 1, in the time frame you selected in Step 2, you need to know your total business expenses for the same time frame.
Your accountant is the best person to speak to with regards keeping accurate records of your business expenses. Even if you have a bookkeeper or accountant maintain your accounts, I believe it’s imperative as a business owner to know where your money is going. You should be able to at the very least come up with a ballpark figure for these typical expense categories. There may be other expenses applicable your business too.
- Advertising and promotion
- Bank charges
- Education and training
- Office supplies
- Professional fees
- Raw materials
- Repairs / maintenance
- Telephone / internet
Step 4 – What do you want to take out of your business?
This figure will be relative to your goals. Are you a new business wanting to calculate how many clients you need to reach break even point? Perhaps you are ready to calculate how many clients you need to achieve a certain salary level for yourself? Are you already paying yourself a salary and want to calculate how many clients you need to give yourself a pay rise or to achieve a new profit point?
The ultimate result of any successful business is to make a profit. The first goal of any business is to get to the point where you as the business owner can pay yourself. In fact, as a business coach, I encourage business owners to learn how to draw a salary from the moment they start generating revenue.
You don’t have to be making thousands of dollars profit before you start drawing a salary. It’s an important fundamental concept of business to learn how to pay yourself a regular wage as early as possible in your business. I’m always quite staggered how many established business owners do not pay themselves a regular salary because they have never laid the foundation for drawing a consistent wage from their business.
It doesn’t matter what the amount is, but you do have to start somewhere. For this exercise, how much would you like to be able to draw from your business on a regular basis? Remember to calculate the amount for the time frame selected in Step 2.
Step 5 – What is a client worth?
For this step, you’re aiming to calculate a figure to represent the average value of a client (or the average value of a transaction) over the time frame you selected in Step 2. To do this you’ll need to consider the various products, services you offer, the price points and frequency of purchases for each one.
What do they pay? How often do they pay? How long do they stay a customer?This will be different for every business and there is not a simple, one size fits all calculation I can give you for this step.
|Client value||$_____________________________||(client value)|
Step 6 – How many do you need?
Now let’s work out an approximate figure to indicate how many clients you need to achieve your goal.
|Goal revenue||/||(client value)||=||Goal number of clients|
So, there you have it. Based on your business goals, your current business expenses and the average value of a client, this is the approximate number of clients you need to work towards.
Surprisingly, I’ve done this exercise with dozens of business owners who told me they thought they needed an arbitary number of clients based on a number they’d pulled from thin air. When we’ve done this calculation, it turned out they actually didn’t need as many clients as they thought.
Not there yet?
There are many ways to grow your business. This article will show you one easy way to do it without needing any more leads. If you’d like to know up to 8 more ways to grow your business without needing any more leads, get in touch with me and let’s chat about how I can help you.
Yes I want to grow my business