Setting a profit goal
Your profit goal is the amount of money you need to meet a number of predetermined commitments that are important to both you and to the future of your business. Identifying a profit goal will help you direct your actions and strategies (once you've identified your profit drivers) to reach your target.
To set a profit goal, you will need to consider the following:
- costs (both fixed and variable)
- owner's annual income
- operating expenses (fixed and variable)
- return on borrowed capital
- return for risk
- return for future growth.
We recommend working with your business adviser to help set an appropriate profit goal for your business.
Fixed (overhead) costs
Your fixed costs (also called overhead costs) are indirect costs that stay the same regardless of your production output — this includes things like rent, utilities, maintenance costs for your work facility, licensing fees, insurance and accounting.
Your direct costs, such as labour and cost of raw materials, are only incurred when you're creating or manufacturing a product, so they're not counted as fixed costs.
Owner's annual income
When calculating your income, you should use an amount you would pay an employee to do the work you're doing. It should include superannuation, but shouldn't be an inflated salary.
Return on borrowed capital
Return on borrowed capital refers to an adequate return on the capital you have invested, at least equal to long term bank interest as well as an additional return based on the level of risk.
Return for risk
This is the return you'd expect, allowing for the associated risks — running a business has more risk than putting funds in a bank.
The return for risk should be calculated in direct proportion to the risks involved. For example, if you invested in a very speculative business venture with a low likelihood of success, you'd expect a very high rate of return if it did prove successful.
Return for future growth
This is the amount you need to invest for future growth and development of your business. You may need to expand your premises after a few years, develop an innovative way to provide a service or new products, or develop a new marketing strategy.