In the modern era, to say that scalability is essential in terms of running a business is
something of an understatement. Scalability is about more than just managing your
organization's ability to grow -- it's about striking the right balance in terms of evolution.
It's about being able to meet the challenges of today while simultaneously preparing
yourself and your business for what tomorrow might hold.
Scalability is so important that it is one of the major reasons why nine out of every ten
as slow growth. It's that sweet spot right in the middle that all businesses should be
trying to hit.
A large part of this will ultimately come down to the CFO’s ability to see growth in the
context of the bigger picture. There's a reason why the CFO is an invaluable position:
they don't take anything for granted, and they're masters at understanding how every
action affects both the demands of today and the potential challenges of tomorrow.
With that in mind, here are crucial data points that CFOs should work to actively assess
on a regular basis to help strike that perfect balance in terms of scalability.
Quantifying Scalability: What CFOs Need to Assess
One of the most critical data points that CFOs should be assessing for scalability comes
down to CAC, or "customer acquisition cost." This is the average amount of money you
need to spend to acquire a single new customer, taking into consideration expenses like
marketing, sales, and more.
To calculate this, divide all of the money you spent on acquiring new customers by the
total number of customers you actually acquired during a given period. If you spent
$10,000 on marketing over a month and brought in 100 new customers, your CAC for
this period would be $100.
Next up is customer LTV, or "customer lifetime value." This is a measurement of the
average amount of money each customer brings into your business. Calculating this
requires your CFO to know your business'; repeat purchase rate, or the percentage of
people who continue to do business with your company again and again.
Assuming that your existing customers have a 10% chance of returning after an initial
purchase and your average order is valued at $100, you can calculate LTV by dividing
that average purchase price by 1 minus the repeat purchase rate. So, in this example,
the equation would be $100 / (1 - 0.1), equaling a customer lifetime value of $111.11.
How these data points matter in terms of scalability, however, has to do with the
relationship between the two. As your business grows and becomes more successful,
your customer lifetime value should always be increasing and your customer acquisition
costs should always be decreasing.
For a company that is scaling the way it needs to be to meet market demands, your LTV
to CAC ratio should be as close to 3:1 as possible. So, to maintain proper scalability in
terms of financials with an average customer lifetime value of $750 over a given period,
your customer acquisition costs would need to be roughly $250 or lower.
If the ratio was much higher than this at 5:1 or even 6:1, it means that your company is
spending too little and you're not scaling fast enough. Your marketing efforts need to be
examined as you're probably leaving a great deal of money on the table. If your ratio is
lower than this at 2:1 or even 1:1, you're spending far too much. Your current growth
level is unsustainable, and it's very likely that you'll run into significant cash flow
problems (if you haven't already).
As cash flow is another one of the major reasons why businesses prematurely close
their doors, you begin to understand why it is so important for CFOs to always keep a
watchful eye on these data points.
In the End
As any business continues to grow, one of its most important objectives is and will
always involve meeting market demands. The challenge comes from the fact that the
market will not be a static one. Not only do the people you're trying to serve change, but
resources change on a regular basis as well.
Scaling too fast almost always equates to a drop in efficiency, quality of service, or both.
This doesn't just lead to dwindling customer relations, but a damaged business
reputation as well. Scaling too slowly also has its pitfalls, as you're essentially getting
left behind by all the competitors who are stealing away chunks of your market that
you'll never get back.
The CFO will play an essential role in the battle for true scalability, regardless of the
business you're running or even the industry you're operating in. Customer acquisition
cost, customer retention rate, customer lifetime value -- these are all crucial data points
that CFOs should assess for scalability.
But the true power of a CFO comes in their ability to understand how all of these data
points relate to one another and how movement in one affects the entirety of your
Great CFOs also understand that scalability is not something you do once and forget
about. Scalability is proactive, not reactive -- assuming otherwise is the perfect way to
artificially limit yourself in a way that will be difficult, or even impossible, to recover from.
[ Published: August 28, 2017 ]