Businesses exist t make profits. However, what happens when you are setting the profit goal itself? If you are reading this, it is probably a question that is weighing heavily in your mind – how to set up your business for success through planning your profit strategy. The problem is that the information out there is scarce, so many small businesses make great mistakes in getting there.
Common questions include: what do you base the profit margins on? What are the lead indicators that help you achieve your profit goals? Here are some of the indicators that can help you achieve this goal.
Instead of focusing on product goals, learning to focus on the process goals
The product goal is when you set a random target, and then work towards it without a clear method to back it up. In other words, you are just working the whole time while hoping you will get closer to achieving the goal itself.
On the other hand, process goals involve you working towards inputs, which eventually lead to achievement of the goal. In other words, you break down the goal into smaller steps that will lead there.
When it comes to setting goals for your profits, the process goals are more important than product goals. An instance can be revenue collection being equal to the number of clients multiplied by the total transactions of each client every year. This might lead you to set a goal of increasing the total number of clients you get every month (a lead indicator), which leads to creating strategies that will attract and retain new clients.
Setting these processes in motion helps you stay focused when you work towards your targets, and makes the goals achievable.
Drawing the profit recipe
It is important to know what exactly makes up your revenue streams, which you can think of as ingredients to your recipe. From there, you move to the statement of Profit and Loss, and subtract your expenses and cost of goods sold from your revenues, to give you the profit.
Setting the KPIs
After you have looked to the past in the previous two steps, the next is looking to the future. For instance, the number of clients that the marketing strategies are projected to bring in each month, what your average transaction value will become, the overheads you will incur when giving your clients these services, and so on.
When you calculate all these, you should be left with the profit and a proper strategy on achieving it. You will also set better targets, because your business goals will be more attainable.
Setting up your profit strategy is a part of looking at the bigger picture, but you have to remember that profits are just a theory. The cash your business generates will be the determinant to whether you will actually grow your profits or remain stuck in the same stage. The good news though? It is attainable when you have the correct strategy of getting there.