SALES CALCULATIONS

VAT-inclusive and exclusive prices

You’ll need to make a calculation when charging VAT on goods or services, or when working out the amount of VAT you can claim back on items which were sold inclusive of VAT.

VAT-inclusive prices

To work out a price including the standard rate of VAT (20%), multiply the price excluding VAT by 1.2.

To work out a price including the reduced rate of VAT (5%), multiply the price excluding VAT by 1.05.

VAT-exclusive prices

To work out a price excluding the standard rate of VAT (20%) divide the price including VAT by 1.2.

To work out a price excluding the reduced rate of VAT (5%) divide the price including VAT by 1.05.

How to Calculate the Customer Lifetime Value (LTV)

  • Average purchase value – It is calculated by dividing the company’s total revenue over a period of time by the total purchases made by its customers during that same timeframe.

  • Average purchase frequency rate – It is calculated by the total purchases made over a period of time by the individual customers that made those purchases during that time.

  • Customer value – It is calculated by multiplying the average value of the purchase by the number of times the purchase is made.

  • Average customer lifespan – It is the average number of years that a customer continues to buy the company’s goods and services.

  • Lifetime value calculation – The LTV is calculated by multiplying the value of the customer to the business by their average lifespan. It helps a company identify how much revenue they can expect to earn from a customer over the life of their relationship with the company.

 

Numerical Example

The average sales in a clothing store are £80 and, on average, a customer shops four times every two years. The lifetime value is calculated as LTV = £80 x 4 x 2 = £640.

Furthermore, the profit margin in the clothing store is 20%, hence the CLV is as follows: CLV = £80 x 4 x 2 x 20% = £128.

The lifetime value figure can help a business estimate future cash flows and the number of customers they need to obtain to achieve profitability.

How to Calculate the Customer Lifetime Value (LTV)

CAC = (total cost of sales and marketing) / (# of customers acquired)

For example, if you spend £36,000 to acquire 1000 customers, your CAC is £36.

CAC = (£36,000 spent) / (1000 customers) = £36 per customer

EQUATION

CAC = TOTAL COST OF SALES AND MARKETING    

            # NUMBER OF CUSTOMERS ACQUIRED

Why understanding your CAC is so important?

Customer acquisition cost is a direct reflection of the future success of your business. Most companies put forth a lot of time and money before they ever see a return on that investment. This metric will begin to matter more and more as time passes and you begin to add up the months it takes to recover from CAC and actually turn a profit.

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