In business, how do you know if you’re winning or losing? Financially winning or losing? It’s a great question to consider any time, and especially when reviewing a year’s performance.
Believe it or not, there are many ways to make that determination, and each has its own merits. But let’s focus on the two key numbers that business owners most often consider when gauging their success: (1) sales (aka your “top line,” which references where this number appears on a profit & loss statement) and (2) profits (or your “bottom line”).
Sales Focus
If you are more naturally-inclined to make a new connection or sales than running the money or numbers (or like “Edge the Entrepreneur”), my experience tells me there’s a good chance you measure success based on sales (top line) or growth in sales.
“Sales,” sometimes also called total income or gross revenue, is the total amount of money your business collects for its services/goods before paying out or using any of it to cover costs or expenses.
Sales is a good figure to focus on when considering how much scale your business needs to break even, facilitate profit goals, or to see how much it has grown vs. previous time periods. But it’s relatively poor for measuring financial performance for other important purposes. And when it’s used as the only gauge of victory, it can leave business owners unable to cover all the costs of running their business, such as those I commented upon here.
Profit Focus
Since business is about making profit and most businesses can only be sustained with profits, profit (or your bottom line) is a better way to judge victory or loss in business.
Here’s why… let’s say your business is like a Big 12 football team and you gain 700 yards a game and score a ton of points. That would be awesome, right? Well, maybe… It may be a thrill to watch or experience. But it ends in frustration, if not heartbreak, if you light up the score board with 52 points… but your opponent scores 58!
You lost the game by six points and your coach will get fired (i.e. your business will fail) if you continue to repeat this performance.
It’s the same in business, only in place of points it works this way… if you make $520,000 in sales and spend $580,000, you lose the game by $60,000. And no, it’s not a moral victory if you scored $300,000 last year and grew your business this year by 73%.
Business dynasties are established and “boosters” are made happiest when you make it a habit of scoring strong “margin of victory” (aka profits) game after game! And guess what – you’ll like it a whole lot too! A 17-10 win is far more satisfying than a 58-52 loss.
I’m stressing this point for this reason: it’s been my observation that lots of businesses and owners get themselves in trouble when they make it their goal to score a zillion bucks in sales or a zillion in growth per year.
What they need to do instead is focus on a margin of victory (profit), and on how large that margin needs to be to sustain success over the long-haul. These are the keys that separate the winners from losers, and what makes everyone happy, happy, happy!
So, how has your business done this year? Is it winning? Losing? Do you have a high-scoring offense that loses heartbreakers? Or a low or moderate-scoring offense that wins handily every time?
My advice… whatever size your business, shoot primarily for a strong margin of victory! And secondarily set your “scoring” financial goals based upon the minimum size required for your business to achieve your margin of victory goals (profit or profit growth) for the year.
We’ve got tools to help you get that done…
How Much Profit
If you want to know how much profit your business needs to generate to cover your take-home pay and income taxes, download and use our tool here. This tool, and the one that follows, works best if you’ve got an already-established business with recent performance figures you can base it upon.
When you use it, insert your business’ figures in the blue text cells, and then focus on the line at the bottom that says “Minimum Profit Target.” The figures on this line should be a, if not the, key financial goal for victory. When your business achieves this goal or better, you’ll know you are “winning” the game!
How Much Revenue
Similarly, if you have a profit goal, in dollars, that will result in victory, but you need to know how much your business will need in sales to produce that amount of profit, our tool here will help you make that determination. Using this tool, fill in your info in the blue text cells, and focus on the line at the bottom entitled “Minimum Revenue Target.”
Both tools can be helpful to you in your planning your way to victory in business!
Long live small business! Long live small business owners!
Jim Smith, Founder, PERFORMIDABLE, LLC