Countless entrepreneurs have launched a business with a great idea and failed because they couldn’t make a profit. Nobody plans to fail. So how can you ensure that your business is profitable?
How much do you need to make to turn a profit? The first step is to decide how much you want to make.
How Much Do You Want to Make?
What is your net income goal for the year ahead? Notice we’re talking about net income here. It’s what you want to see in the bank after all your expenses have been taken care of. This is the profit you want to see your business generating.
Break that net income goal for the year down to figure out what your monthly net income target is.
Yearly goal/12 = monthly target
Now it’s time to factor in expenses to determine what your gross (total) income target is – the total amount your business generates before expenses.
What Does it Cost to Run Your Business?
Do you really know what it costs to run your business? Many expenses are commonly overlooked by business owners. This results in selling yourself short – not charging enough for your products or services (not making a profit).
Consider these important factors:
Cost of Goods Sold
- Inventory or materials to produce your product or service
- Freight
Operating Expenses
- Rent or lease on your building
- Vehicle leases, maintenance & fuel
- Production equipment
- Electrical & Gas
- Waste Removal
- Phone & Internet
- Repairs & Maintenance
- Toilet Paper, Paper Towel & Soap for the washrooms
- Travel & Entertainment
- Cleaning Services
Keep in mind that equipment has a lifespan. Most things will eventually need to be replaced. Have you factored that into your operating costs?
For example, let’s assume you’ll need to replace your computer once every 4 years at a cost of $1,000. To make sure you’re prepared for that expense, you either need to save money in advance, or factor in a financing arrangement (like lease payments). So take that $1,000 and divide it by 4. This gives you a cost of $250 per year. Divide that by 12 and you end up with a monthly cost of about $20.
Admin Expenses
- Computers, Phones, Printers (& Ink/Toner)
- General Office Supplies (paper, pens, file folders, etc.)
- Postage & Courier Costs
- Insurance
- Corporate Taxes
- Business Registration & Licensing Fees
- Accounting & Legal Fees
- Interest & Bank Charges
Payroll Expenses
- Salaries & Wages (remember vacation pay & sick days, health benefits, etc.)
- Commissions
- Payroll Taxes
- EI
- CPP
- WCB
- Breakroom Supplies (coffee, coffee filters, coffee maker, snacks, etc.)
Marketing Expenses
- Website (Domain Name, Hosting, Design, Maintenance)
- Promotional Materials & Business Cards (Design & Printing)
- Social Media Management
- Content Creation
- SEO (Professional Services)
Time Expense
Time is money, as they say. The time it takes you to produce a product, provide a service, make a sale, and get paid is part of the cost of running your business.
Are you paying for materials and staff for weeks or months before you get paid for the product or service they’re selling for you? This needs to be factored into the price of the products or services.
How Much to Charge for Your Product or Service
When you know the total cost of running your business, you can accurately determine how much you need to sell your products or services for to make a profit.
Total the costs of running your business for a year. Then add the amount you set as your net income target. This is the total your business needs to generate to make your desired profit in a year.
Cost of Running Business + Net Income Target = Total Income Target
Average Deal Size
To set some realistic sales targets, you need to know what it costs you to make a sale. Again, look at the cost of goods, admin costs, etc. and the time it takes your salespeople to close the deal.
Now look at what your average deal size. Is it enough to cover the cost of making the sale? Are you making a profit on it?
There are numerous pricing strategies to explore when setting your prices. Various factors come into play, such as the product or service itself, competition, demand, your costs, etc. We go into pricing strategies in greater depth here.
Sales Targets
Once you’ve set your prices, you can figure out how many sales you need to make to meet your income targets. If your yearly gross income target is $100,000 and your average deal size is $1,000, you need to make 100 sales this year. That gives your sales team a monthly goal of just over 8 deals.
If you’re meeting your sales targets, you should be successfully making the profit you want for your business.
Make Your Business Profitable
Whether you’re just starting your business or you’ve been running your company for years, make time to work on your business, not just in your business. Block off a time in your calendar once a month or at least each quarter to take a look at how your business is doing in each area and to make plans for the months ahead.
Profit doesn’t happen automatically. Don’t blindly slave away at running your business, hoping you’ll have money left in the bank at the end of the month or year. Do the math. Make your plans – then enjoy your profits!
