Better Business Planning Starts with a Profit Goal
Every business should serve a purpose that is greater than simply making money, but profit ultimately makes purpose possible.
Profit is also the most accurate measure of business success, and it is an especially important metric for product design companies. Revenue is often a more exciting conversation piece, but it can certainly be deceiving. Business decision-making (when to launch a new product, when to invest in new equipment, etc.) that is based upon revenue can sometimes be downright dangerous. Consider the following…
Example 1: A company with $1 million in revenue has $950,000 in expenses and a profit of $50,000. The gross profit percentage is quite small (only 5%).
Example 2: A company with $500,000 in revenue and the same $50,000 profit, would have a significantly larger profit percentage (10%).
It’s easy to see that the second company is performing more optimally and is better postured to make investments. Your profit percentage is an extremely valuable metric, but do you know what your current percentage is? Do you know what it should be?
Calculate Your Profit Percentage
To calculate your profit percentage you will need a firm grasp of revenue and expenses. Keep in mind that your net profit will be distorted (and potentially misleading) if you do not pay yourself a true market wage. If instead of a wage, you take a distribution, you will need to subtract that amount from net income. For example if net income is $50,000 and the owner paid out $20,000 in distributions, the measurable profit is $30,000.
Develop Appropriate Business Strategies
Once you have calculated your profit percentage, you need to understand what it means. Experience has shown us that companies typically fall into one of four categories. Verne Harnish, the author of a very good book called Scaling Up, has developed a similar understanding of profit and business success. Here are some general breakpoints that you should be aware of…
- Barely Surviving (5%)
- Room for Improvement (10%)
- Doing Great (15%)
- Pat Yourself on the Back (>15%)
Determine where your business falls and identify a profit goal. Profit percentages and profit goals can be extremely helpful to product design companies that must manage product development processes in addition to general business operations. Reaching your profit goal may require that you simplify product design or streamline product offerings. You may need to increase prices or make changes to product launch schedules. The solution is different for every business.
If you aren’t sure where to start, that’s where we can help. Email email@example.com to explore a working relationship.