Profit should not be an Accident 0
Posted on 17, May 2013
in Category Management Consulting
Profit is regarded as the result of the simplified formula Revenue - Costs = Profit
That is how most of us have been trained, and as a result profit is often accidental. We plan to have high revenue, we plan to have low costs and we hope that we have profit as a result.
There is a simple but highly effective variation of this basic accounting calculation that many will find very useful.
Target Profit is the intended goal. Revenue and costs are tools used to realize your Target Profit
Revenue – Target Profit = Gross Margin (the amount available to run the Business)
We advise our clients to establish their Target Profit. It is the primary objective. What do they have to do to realize it? Target profit should not be based on historic performance but on what the profit really should be. Target Profit is best established by taking the greater of the following metrics.
- Above industry average (as % of Revenue). This assumes that you can find out the industry average
- Greater than the DJI average profit (As % of Revenue)
- For Business owners we recommend that they look at a fully secured savings/bond rate. Then at least double it to account for the risk that the business owner has to take. i.e. savings rate 2.75% the Target Profit should be at least 5.5%
- If all of the above are not available we start with 15% Target Profit
By setting profit as the target, focussing on it and with hard work your business will realize exceptional increases. Some recent successes include;
- A profit increase 16% in 6 weeks
- An annual loss of ~ $249,000 was reversed to a profit of ~ $345,000
- An accidental profit of $ 800,000 was turned into a realized Target Profit of $4,400,000 with only a modest increase in revenues
- An accidental profit of ~ $500,000 turned into a realized target profit of $1,800,000 with only a nominal increase in revenues
If the Target Profit concept is something that interests you please let me know. There are more detailed models I would be delighted to share with you.
Richard P Shaw, CMC, President