One of the biggest questions every entrepreneur faces is “when should I scale my business?” We can answer this question ourselves as long as we make good use of metrics. However, once we feel ready to scale our business, another question comes to mind: “what should my marketing spend be?” The most sensible answer would be “as much as you can,” since you have found the formula that makes your business profitable. That said, we need to be cautious and manage our cash flow carefully. In this article, I will explain how to calculate your maximum marketing budget step by step.
Key Factors Behind Your Marketing Spend
We need to consider three very important factors:
- LTV > CAC (Lifetime Value greater than Customer Acquisition Cost).
- Cash on hand.
- Working capital.
The first factor is essential for scaling. You cannot scale if the cost of acquiring a customer (your marketing spend) exceeds the revenue that customer generates over their lifetime. The second and third factors help you manage cash flow and optimize your investment. It is not the same to pay your invoices in one month versus three months. Likewise, it matters whether you receive payments in 30 days or 90 days. Failing to account for this can bankrupt a company even when revenue exceeds expenses.
Calculating Your Marketing Budget
The first thing we need to know is how long it takes to recover the investment. In other words, if we spend 1,000 euros on marketing, we need to know how long it takes to earn that 1,000 euros back. We calculate this time to return on investment using the LTV > CAC formula. Let me give a simple example: Suppose the CAC for a customer is 5 euros. This customer generates 5 euros in revenue after four months. From that point on, all revenue from this customer becomes profit. Therefore, the return on investment time is four months.
Now that we know the return time, we need to factor in the working capital. Working capital measures the difference between how long we take to pay our bills and how long it takes to receive payments. For example:
Clients pay us at: +1 month
We pay our suppliers at: -2 months
Return time adjustment: 4 – 1 = 3 months
Because we take longer to pay than to collect, we gain a one-month working capital advantage. So what is our marketing budget? This is where the third factor comes in: cash on hand. The formula works as follows:
Investment (marketing spend) = cash on hand / return time
In our example, if we have 90,000 euros available for investment, we could invest up to 30,000 euros per month in marketing. If we invest more, we risk running out of cash.
Finally, remember that the most important factor remains the first one: LTV must always be greater than CAC. Without meeting this condition, scaling your business will only accelerate your losses. Once you confirm a positive LTV-to-CAC ratio, use the formula above to set a safe and sustainable marketing budget that maximizes growth without jeopardizing your financial stability.