How much profit is enough? - lookout - Brief Article

Masonry Construction, July, 2002 by George Hedley

Business owners often ask me "How much profit should I expect to make--5%, 10%, 15%, or even more?" Most business owners and managers have no set goals. They claim that their profit goal is to make as much money as possible or to earn more than they are currently making.

Is as much money as possible a target? More than what?

These targets or goals are not clear-cut. A young entrepreneur came to me for advice and told me that his 5-year goal was to work really hard be totally stressed out, hopelessly in debt, and make no money. Would you believe that he made it!

I am not impressed with people who are busy, overworked, underpaid, or boast about their latest sales figures. What I admire are organized companies that hit their goals and make the expected return and profit for the risks that they take.

The goal in business is not to stay in business. The goal in business is to always make a profit. Unfortunately, 92% of all business owners reach age 65 with $0 net worth.

It's not how much you make that matters. It's how much you keep (after overhead, job costs, personnel, and a fair salary for the owner).

Profitable driven business owners have a vision of what they want. They have goals in many areas, including business, customers, operations, financial, personal, and profit. They have precise goals, including:

1. Return on equity

2. Revenue

3. Overhead costs

4. Average markup

If asked to invest $100,000 in a new start-up business, what return would you want--10%, 15%, 25%, 50%, or more? After considering all of the risks, I would never invest in a new business that didn't offer at least a guaranteed 15 to 25% return on equity or capital. Likewise, the minimum pretax net profit goal for your company should be 15 to 25 percent (or higher) return on equity.

Follow the seven-step formula in this example to always make a profit.

Looking at the example, the company's overhead is projected at $150,000, equity is $300,000, and the return on equity goal is 20 percent. Based on a revenue goal of $1,400,000 and using an average markup of 15%, the company's annual net profit goal is $60,000, which is a fixed number. Not more, and not as much as possible.

* What is your revenue goal?

* What is your overhead goal?

* What is your average markup goal?

* What is your profit goal?

Companies without precise profit goals never make enough and often don't make anything. It's hard to hit a fuzzy target that doesn't exist or moves around.

Companies that track costs, target profit, regulate overhead, and watch what they keep are in control, organized, and one step ahead of their competition. Fix your profit target and revenue goals.

Keep them in front of you all of the time. Share them with your people. Track your progress. Make it happen.

Formula

1. Equity                               $  300,000
2. Return on equity goal         X             20%
3. Net profit goal (pretax)      =      $   60,000
4. Annual overhead cost                 $  150,000
5. Projected gross profit        =      $  210,000
6. Average OH&P markup goal                    15%
7. Annual revenue goal        (5 / 6)   $1,400,000

George Hedley is the owner of a $100 million construction and development company and the recipient of the nationally recognized "Entrepreneur of the Year" award. He also owns Hardhat Presentations and speaks to companies about building profitable businesses, leaders, and loyal customers.

For information or his free management e-newsletter, visit www.hardhatpresentations.com or call 800-851-8553. Mr. Headley also can be contacted via e-mail at gh@hardhatpresentations.com.

A number of Mr. Hedley's books are available at the World of Concrete Bookstore, www.wocbookstore.com.