Business Building Part Two: Do You Have a 20 Percent Profit Margin?

Business Building Part Two: Do You Have a 20 Percent Profit Margin?

| June 27, 2019

Once you get through the first year of your new business, it's time to start thinking about your long-term success. Developing a three-year growth plan should be your first step. Unfortunately, many owners focus on revenue as the only goal, spending all their time finding and servicing new business and virtually no time planning for the investments needed to continue to build the company and increase profitability. Your three-year goals should encompass a wide variety of factors, including the following:

Profit margin. At a recent Long Island Food Council meeting, some attendees were surprised when I contended that a 20% profit margin should be their target for their business. Just meeting your revenue goals is not enough; you will be at full capacity and eventually start falling behind. I wish I had a dollar for every time a business owner told me, "I wish I had more staff. I don't have enough time to get everything done." My counter is, "If you don’t build in the profit, and you need to add another salary to your balance sheet, you will never get there."

Your business does not magically produce all the money you require to help it grow and provide you with a comfortable lifestyle. It's imperative that you calculate your pricing and hours spent needed to produce and sell your product or service. Research your own industry to find out what a healthy company looks like. Then compare it to where you are now and consider how you will make improvements.

Competition. There may come a point where larger competitors stand in the way of further growth. The stronger your niche, the better you can compete. However, eventually you may want or need to cash out. How can you prepare your business to achieve maximum value? Potential buyers love to see profit and free cash flow.

Debt. Banks are typically more inclined to provide a line of credit once a business has been successfully operating for more than two years. However, whether it is new or old debt, your three-year goals must factor in how to manage and reduce your debt load. If you do borrow money, don't use credit cards and avoid borrowing against retirement funds unless you have a well-developed business plan in place. A credit line should only be used to fund short-term needs (say, a payroll run) and can be repaid within a few days. It's a lifeline, not an income stream.

Profit is not a dirty word. And it's not impossible to achieve. It simply has to be built into your pricing.

In Business Building Part Three, we will delve deeper into the process of pricing.