I’ve got an easy question for you;
How much money do you want to make?
Got it?
Let’s try something a little harder.
Do you know what sales you need make for that to happen?
If you’re like most business owners I meet, you’re shrugging your shoulders right now.
Obviously, the problem with that is that you have no idea, and consequently no plan, on how to make that much money. You’re using hope as your strategy and just waiting for a miracle to happen, just work hard, hustle 25/8 and it’ll all work out right?
Sorry. You’re Wrong.
Why?
Good people with lots of potential and plenty of hustle have used hope as their strategy too. The statistics tell us, for the vast majority this doesn’t end well. 45% of all new businesses starting today won’t be here in just 3 years.
Opportunity + plus hard work fails to consider the fundamental components before that.
Direction and Focus.
Treading water is hard work, but the only place you’ll go is where the tide takes you. And that’s fine if you’re waiting for someone to rescue you. But here’s the inside mail.
No one is coming.
So if you want to stop drifting with the tide, if you truly want to rescue yourself, then you’re going to need a plan. Because once you know what sales you need, your business strategy gets easier.
You’ll know how many staff you need, what sort of premises you’ll need, what sort of systems and process you’ll need and what marketing you need to do.
Everything gets easier because you know the target you’re trying to hit. You can forget about all the other noise and just focus on the things that matter.
Social, digital, networking, organic, paid, skywriting. There is so much you can do, and only a few that you need to. With this and a few other bits of info you’ll be able to work out things like;
- What a customer spends with you
- What your conversion rate is
- You then know, how many leads/prospects/people walking into your shop you need.
- And with that, you’ll know where to focus your marketing efforts and how much you can spend on it
This is what knowing your sales targets gives you.
Clarity, focus and direction.
Sound good?
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The Numbers
Right, then let’s get back to the numbers.
This is where that basic maths you learned a million years ago and thought was such a waste of time comes in very handy.
So the numbers you’re going to need are;
1. Your current sales
2. Your current cost of sales or current gross profit
3. Your overheads
4. Your desired profit
These are found on your profit and loss statement.
It’ll look something like this;
|
Sales |
$1,000,000 |
|
Cost of Goods Sold |
$400,000 |
|
Gross Profit |
$600,000 |
|
Overheads |
$500,000 |
|
Net Profit (before tax) |
$100,000 |
Now you need to break out the calculator and work out your Gross Profit as a percent of your sales.
In the example above it is 60% (600,000/1,000,000).
And with that you can now work out how many sales you need to make $0 profit, you may have heard of this as your breakeven point.
Breakeven Point
The formula is super complicated so stay with me;
Overheads/Gross Profit %
In our example it is
$500,000/60% = $833,333.34
Proof
To prove that maths works let’s look at this long hand;
Breakeven sales $833,333.34
Gross Profit = $500,000 ($833,333.34 x 60%)
Less Overheads $500,000
Profit $0
Righto, very clever Nathan, but I don’t want to make $0 profit,
I Want To Make Bank!
I know. Stay with me.
Because you didn’t go into business just to breakeven, we can manipulate this a little to work out the profit you do want.
Let’s say this example business wants $200,000 before tax profit.
We simply add this $200,000 to the fixed expenses and then divide that total number by the gross profit %
Overheads $500,000
Desired Profit $200,000
Total $700,000
Sales needed for $200,000 profit
Total/Gross Profit %
$700,000/60% = $1,166,667 sales
More Proof
Sales $1,166,667
Gross Profit (60%) $700,000
Less Overheads $500,000
Profit $200,000
Cash Not Profit
Now because you’re not a bean counter and do in fact spend cash in your personal life and not Net Profit Before Tax. We’re going to get a little bit crazy and throw another piece to the formula.
Let’s say the example business we’ve been using wants $200,000 after tax, and that level of income, their accountant has structured their group so they will have an average tax rate of 32%
To work this out we need to reverse engineer the profit before tax:
After tax profit $200,000
Tax Rate 32%
Before Tax Profit = $200,000/(100%-32%) = $294,117
Another Proof
$294,117 x 32% = $94,117.
$294,117 – $94,117 = $200,000
So we’re now using $294,117 + overheads $500,000 = $794,117 and dividing that by the Gross Profit margin of 60% to get the sales required which are now $1,323,528.
So what?
From here you can see that to make the profit they want, they only need to increase sales by $323,528 (Required sales $1,323,528 less current sales $1,000,000) They can then work with their advisors on how best to achieve this, and put together a strategy to be implemented ASAP.
That is the power of knowing your numbers;
Clarity. Focus. Direction
If all that number crunching is too hard, we do it for you as part of our business consulting services. So check them out.