Most people say: "It's what's left over after everything else is paid".
Let's re-state that definition. Profit is your goal. It's what you're aiming for. It's the very foundation of your business model because without profit, your business isn't going to do very well.
Without profit, rarely will your business ever be able to give you what you want. The first question to ask then is: "How much money do you need every year to live the life you want?" Assuming you never have to work again, how much do you need to be able to pay all of your bills, cover all of your expenses and do the things you want to do? Is it $100,000? $250,000? $2 million? Add another 40 percent to your answer and you have the estimated net pre-tax profit figure your business needs to make.
Once you have that number, estimate a realistic Net Margin that your business could and should generate. Net margin shows how much of each dollar earned by the Company is translated into profits. Some businesses will only be able to generate a 10% net margin. Other serviced based business can generate as much as 25% - 30%. Whatever you estimate, take your profit figure and divide it by the net margin to calculate the gross sales your business will need to generate.
Let's suppose, for example, you need $100,000 each year to live your life. If you add 40% to that figure, your profit number is $140,000. The thinking here is that your business will generate $140,000 in profits, of which $100,000 goes into your pocket. If you work at the Company, you will also get a salary commensurate with what you would pay someone else to fill that position. In other words, your $100,000 return is your reward for starting the business and for all the effort, worry, hard work and risk invested.
Let's also assume that a good net margin for this business is 20%. In other words, 20% of every dollar of gross sales is net profit. Following the calculation above, that would mean this business would need to generate $700,000 in sales annually - ($140,000 / 20%).
You now have the means to calculate your profit goal!
Once you have a profit goal, you need a strategic plan on how to get there. This will need more questions answered like:
Ã˜ Who is your ideal customer? Describe them.
Ã˜ How often will they buy from you each year?
Ã˜ How much will they spend on their average purchase?
Ã˜ How many new clients will you need to generate annually?
Ã˜ How loyal will they be?
Ã˜ How many years will they continue to buy from you?
Ã˜ What products and services will you be selling?
Ã˜ What geographic areas or markets will you be serving?
Answer these and get your Chartered Accountant and Business Advisor to help, and you are on the right track.