Achieving your profit goal
To achieve your profit goal you need to calculate your minimum sales requirement. That is, you need to work out the level of sales (turnover) that will produce enough revenue to cover your operating costs plus your personal financial commitments.
Your turnover is essentially composed of:
- volume of sales
- selling price (i.e. cost price + profit margin).
Selling price and profit margin are key determinants of the level of sales you must achieve to generate enough revenue for your business. The higher the selling price, the lower volume of sales required (and vice-versa).
For every product you sell the money you receive will go into covering your variable costs (materials and direct labour) as well as contributing towards your fixed costs and profit goals.
Minimum sales requirement
The minimum sales requirement is the point where both your fixed costs and your profit goal are covered by your gross profit.
It's often useful to express the annual minimum sales requirement in terms of weekly, or even daily, units you need to sell. If your business is not capable of trading at the minimum sales requirement, then it will not be capable of meeting your profit goal.
Use the following interactive calculator to help you work out your minimum sales requirement. Once you have read and understood the example, you can type the numbers that are relevant to your business into the calculator to see your minimum sales requirement.