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When starting your business, the first thing you should do is calculate how much revenue you will have on a monthly basis. This is referred to as recurring monthly revenue (RMR).
Recurring means that this income stream can be repeated every month for the rest of your business’ life. For example, if you offer online courses, your RMS could be offering one course per week for a whole year!
By calculating RMR, you also determine how much money you need to run your business with. You can then use these numbers to make investment or marketing decisions.
You may also want to compare your monthly expenses against what you earn so that you know whether it makes sense to keep running the business or not. It might even give you an idea of what kind of budget you have got to work with!
There are two main reasons to add recurrent revenues to your business model. First, it gives you more margin to spend because you don’t need to worry about how much money you have left at the end of each month. Second, it helps you focus less on getting new customers and instead focus on keeping the ones you already have.
This article will go into detail on how to calculate RMR in your business.
One of the most important parts in determining how much money you make is calculating your variable cost. Variable costs are defined as those that increase depending on how much business you have, or what kind of advertising, marketing, or sales strategies you are using.
For example, if you are offering free shipping for online purchases, this would be considered a variable cost. Because it does not stay constant! The more shipments you send out, the higher the variable cost per shipment. This means that your monthly revenue can go up very quickly, which is why some companies will offer free shipping just to keep revenues high.
Variable costs should be excluded when calculating your income because they push up the price of buying products, but then only add slightly to the cost of running your business. Most importantly, they do not change so your income cannot grow with them!
By adding all of your direct non-variable expenses into your calculation, we were able to figure out how much money you earn per month.
A key part of calculating recurring monthly revenue (RMR) is determining what are referred to as your fixed costs. These are expenses that remain constant even when there is no income, or only limited income.
Many business owners make the mistake of not including their fixed cost in RMR calculations. This can seriously underestimate how much money they will actually make with their business model!
By not including these costs in the equation, you also discount how expensive those costs are which benefits the company being analyzed less effectively. For example, if your rent is high, it may be more effective for you to look into office space that is closer to where people live than investing in a house and renting out the rest of the room.
Another important fixed cost to consider is marketing. Even though you may invest heavily in advertisements, radio campaigns, and direct mailers, this will not produce results until you have built up enough brand recognition and trust with potential customers.
So how do you calculate your monthly conversion rate? That is, what percentage of people that use one product or service within a given period of time are actually buying a secondary product or service from you?
The easiest way to do this is to look at the past! By looking back at your sales and marketing records, you can determine what proportion of purchases were because of exposure to your products or services. For example, if 80% of people who purchased a phone also bought a plan for smartphone access, then we could say that having a mobile device access account with us would bring in $80 per month in new revenues for us.
This is not only helpful for estimating your own conversion rates, but it can be done on a monthly basis as well. Simply add up all of the individual conversions (phone plans) and divide them by the total amount of time they were active to get an average value.
Now that you have determined your startup cost, your next step is to determine how much money you will need to keep the business running. This is called your MVP (minimum viable product) or launch budget!
Most entrepreneurs underestimate the price of their own services when they start their businesses. They assume that they can offer their service for free in order to test the market and see if there’s enough demand to make it worth their while.
But before you do that, you must also take into account your other major expenses, which are:
Your house/office – where you will spend a lot of time working as well as some sleep
Storage space for all of your equipment and supplies
Internet access so that you can run basic marketing tools like Facebook and email
Phone line usage for calls and possibly voice mail
Some people include health insurance as part of their MVB, but we won’t recommend doing this unless you have proof that you will be able to cover these extra costs with little to no income.
Many new businesses fail because they don’t factor in these additional costs. They sell out just months later because they couldn’t bear the thought of spending more money than they had.
So, add up the total amount that you want to spend on your business and then multiply that number by 1.5 to find your MVB.
In our example, let’s say you spent $500 per month on marketing and sales efforts (your Variable Costs). Two is the ideal number for your Break Even Point as it assumes no growth or loss at that price level.
If your revenue drops below this amount, you lose money, so make sure you are always just one step ahead of this. This gives you an idea of how much revenue you need to have in order to stay in business!
By using these two numbers (the break even point and average monthly revenues), we can calculate what your recurring income should be. By taking your total revenue less than your broken cost, we know how much needed to be invested to keep up with expenses!
This helps you determine if investing in resources to grow your business is a good thing or not! It may also help give you some insights into whether you are able to invest more in your business right now or not.
In our example, let’s say your company has monthly revenues of $4,000 per month. Your average customer stays for one year so we can add 30 days to get their length of service (365 total days).
That means each person in your company needs to generate a gross income of $40 every day to make enough money to cover operating expenses (rent, employees, marketing, etc.). If someone was not able to do this, then you would need to find other sources of revenue or reduce overhead costs. This is called breaking even!
Your net profit will be what is left over once all bills are paid. By adding up how much you spend more than what you earn, you can determine if you are making a profit with your business model.
Now that you have determined how much money you will need for initial marketing, it is time to determine how to calculate recurring monthly revenue (RM).
Recurring means that you will still need this amount of money every month, but instead of spending all day Sunday launching your app, you are charging more per hour for the work you do. This gives yourself more time to focus on other things like family!
By defining an initial cost, your next step is to determine what type of income you want to achieve with your app.
You can choose between two types of incomes:
Infrequent purchase revenue – which requires less investment, but may not happen very often
– which requires less investment, but may not happen very often Occasional free item download revenue – such as having someone else create content for your site or app
For both of these, the equation is the same: multiply your MVP or launch budget by 1.5 to get your initial marketing budget.
From there, you should know how to test your app and gather data to determine if people are interacting with the app and/or paying for services through the app.
Now that you have determined how much money you will need for initial costs, it is time to determine your conversion ratio or “marking-to-market” cost. This is defined as the amount of money you spend per new customer acquired.
For example, if your average monthly expense was $1,000 then your conversion ratio would be 1,000 divided by the total number of customers minus one. The reason why we use the total number of customers – not just active ones -is because you may want to exit (or close) an account at some point, but you still want to include those users in the calculation.
This way you can calculate how many dollars you must invest to make enough profit to cover your overhead every month! And more importantly, it helps identify which areas of your business are spending too much money so you can reduce waste.
