What small business profit goals should you set?
Profit is the fuel for all small business owner benefits. So why not set some firm, small business profit goals?
Both short and long term benefits, namely earnings (revenue) and value (capital) are derivatives of profit.
Marketing is a powerful tool to be wielded skillfully by small business owners.
By definition marketing is the commercial discipline of serving your customers profitably.
Therefore, with sound marketing campaigns (generating lots of quality sales leads) you can place your hands firmly on the controls of both your near term earnings and long term future asset value.
The profit goals of your small business should ideally be reverse engineered from your desired earnings (over however many years) based on ideal exit value.
Should you sustain the targeted profitability over the duration of running your small business, then earnings over the interim should lead to target exit value. The benefit being, the achievement of a exit selling price in line with your expectations.
Small business profit goals are important in keeping the very purpose of running your business on track.
Here’s a working example…
e.g. Desired annual earnings = £50,000 / target exit value = £50,000
Target net profit = £35,000
Estimated valuation = £35,000 x 1.7 = £59,500
The most common and widely accepted measures of profitability in small business accounting and bookkeeping are as follows:
- Gross profit = sales revenue minus cost of sale (surplus monies remaining after each commercial deal fulfilled by your business.)
- EBITDA = gross profit minus overheads ‘earnings before interest, taxes, depreciation and amortization’ (essentially this is earnings before preferential treatment of business earnings which is very much a matter of preference for every owner. Treatment of business earnings is largely dependent upon your accountancy handling of drawn profits from the enterprise, intricately linked to your own personal taxation status.)
- Net profit = gross profit minus overheads interest and taxes.
These three measures of profitability for small businesses gives a yardstick for the vital statistics related to the value of your overall business.
The root of profit is being able to generate revenue.
From then, so long as the gearings of your budgeting is disciplined i.e. ‘outgoings’ are minimised and sales price for products/services is set high enough to generate a healthy surplus, then a sound exit should be on track.
On this trajectory, interim earnings and net profit then become but a formality.
As for ‘how much earnings can I expect to make?’… this is really a matter of the mechanics of your business model.
A profitability analysis (profit scenario planning) would simply involve the calculation of how many sales and therefore marginal profit increments are need to achieve target earnings. The following is an example:
e.g. total annual revenue = £100,000
Gross profit: £45,000…therefore gross profit margin = 45% (£45K / £100K)
EBIDTA: £18,000…therefore EDIBTA margin = 18% (£18K / £100K)
Net profit: £7,500…therefore net profit margin = 7.5% (£7.5K / £100K)
[Assumption: In our consultancy experience, we find that most service-based small businesses have a gross profit margin of around 30%. Perhaps product-based small businesses achieve a GP margin of around 20%…we just speculating.]
By this, the example above is an exceptionally profitable business (GP at 45%). Therefore, this business would be an attractive prospect for a prospective owner seeking a higher than average return in earnings for their efforts, should they be willing to labour, of course.
Anyway, that’s enough talking about it, the only way to make profit is to put it all into practice!