Targeting Profitability for Small Businesses
One of the most important results of your “bite-sized” business plan is the target you set for profitability, and it’s not as simple as just subtracting your expenses from your top line revenue number.
You need to establish a line item target for profit, and what is the right amount? I believe the right profit target is a balance of two things:
- Giving you a competitive return on your money.
- Giving you room to make mistakes!
Let’s focus first on the definition of a competitive return. At an absolute minimum, your profit should be more than the return you could get from money market funds, certificates of deposit, and even Treasury Bills. These examples only target a single-digit percentage profit, and it’s nowhere near good enough for you.
Double-digit percentage profits, the level attained by professional investment managers, are necessary when the level of risk increases. Because of the risks you face as an owner, your profit – your upside – needs to be in this range.
The second reason you need to make healthy profit is so that you create room for making mistakes. Think about it; as owner, your job is to think about the “big picture” – not just your business operations, but the market, the competition, and everything else as well. You’re human, and you’ll make a mistake or two. If you’re not profitable enough, you won’t have the cash and capital reserves you need.
Set a goal of achieving a double-digit percentage profit to grow your business!