VIDEO: Setting Effective Goals for Improving Profitability
Curious about how you can set appropriate profit targets for your business? In my latest video, I discuss key insights from Greg Crabtree's book - Simple Numbers, Straight Talk and Big Profits - including a poignant example from one of his key clients.
So, the question you’re asking is “How do I set appropriate profit targets?” I’m going to use content from a great book by Greg Crabtree titled, “Simple Numbers, Straight Talk and Big Profit.” The first decision is whether to define profit as a percent of revenue or gross margin. As a general rule if gross margin gets lower than 40% then you should relate profit to gross margin so that you can have comparison to other businesses in other industries.
Now here’s what Greg Crabtree’s CPA firm found, first at a 5% pre-tax profit margin your business is on life support, at 10 % pre-tax profit the business is doing well but you have untapped potential, and at 15% the business is in great shape and above 15% enjoy it while you can. Highly likely competitors are going to come in and push back your profit margin.
Now let me share a story, Greg got involved with a firm in the services business. It was about 5 million in revenues 14 tough years, they were barely turning a profit and the owner was having a hard time receiving a reasonable wage and he used content from his simple numbers approach.
The first thing that his team did was make gross margin the top line instead of revenue. They then adjusted the owner salary to pay him market share, which then also made the profit more realistic, and they introduced a ratio called “The Labor Efficiency Ratio” which measures for every dollar you spend in labor, how productive is that labor force.
Five years later, they're a twenty-five-million-dollar business generating a ten percent profit. Yes, there are always exceptions but not as many as you may think, relative to looking at your profitability in this way. So, contact me if you want to explore various tools and methodologies to help your company improve profitability.