Starting a small business is no easy task. It takes hard work, determination, and most importantly, a sound business plan. Too often, small businesses fail because they are not profitable enough to stay afloat. To ensure the longevity of your small business, it is important to aim for a 10% profit margin. This number may seem daunting at first, but with careful planning and execution, it can be easily achieved. Read on for tips on how to make your small business more profitable!
Why a 10% profit margin is important for small businesses
A 10% profit margin is essential for small businesses because it allows them to break even and stay afloat. This number may seem daunting at first, but with careful planning and execution, it can be easily achieved. Here are five reasons why small businesses need to aim for a 10% profit margin:
1. It allows small businesses to stay afloat and avoid going out of business. Let’s face it, being a small business is hard and running on razor-thin margins makes it even harder so aiming for something that eases the pressure of running a small business will help you achieve your long-term goals.
2. A 10% profit margin is a healthy goal for small businesses to strive for. While hitting a 10% profit margin will make for a healthy business, maybe you aren’t quite at 10%. That’s OK. One of the most important things about goals is the process that you go through to work towards your goal. By just setting this goal you will think more strategically and pay more attention to your finances than if you didn’t have this goal.
3. It helps small businesses become less reliant on costly investments. Small businesses don’t have as much access to capital as larger businesses. Most investment in a small business is with debt which can be costly and harmful to cash flow. However, at a 10% profit margin, you will be able to create a fund so you don’t have to worry about downtimes. Additionally, the extra cash flow from a 10% profit margin will help pay off any debts that you may have already taken on.
4. A 10% profit margin is an achievable goal that can be accomplished with careful planning and execution. Almost anything can be done with planning and proper execution of that plan. That being said, just like any other plan or goal, hitting a 10% profit margin takes discipline and sometimes sacrifice. You have to be willing to pay attention to your expenses and sometimes cut certain items that you never thought you would have to cut. You need to be strategic with this because cutting too deep or cutting certain areas can result in harming your business and make things worse.
5. Achieving a 10% profit margin can help small businesses grow and expand their operations. The cash flow provided by attaining a 10% profit margin is significant enough that you will be able to retain enough cash to hire more team members, buy new equipment, open up new locations, or purchase other businesses. This provides more value to your business and sets you up to be able to experience the freedom entrepreneurship can provide.
How to use the 10% profit rule to structure your profit and loss
Now that you know why a 10% profit margin is important for small businesses, it’s time to learn how to use the 10% profit rule to structure your profit and loss. This is an essential step to make your small business more profitable. Here are four tips on how to do this:
1. Create a labor cap. This is exactly what it sounds like. Just like the caps that sports teams abide by. Take your profit and loss statement for the last 12 months and remove all labor costs. Let’s call this pre-labor profit. Now, figure out your 10% net profit amount by multiplying your revenue by 10%. The difference between your pre-labor profit and your 10% net profit is your labor cap. It’s OK if you are over your labor cap at first. As mentioned above, this is a goal to strive for, especially at first, and as long as you follow your plan you will at least behave in a way to attain that goal.
2. Set a budget and stick to it. Having a budget is one of the most important things you can do for your small business. It will help you stay within your means and not overspend on unnecessary items. When you have a set budget, it’s easier to hit a 10% profit margin because you know exactly what you need to do to make that happen. Make sure your budget uses the model you created with your labor cap. This will show you where you have variances and you can adapt and plan accordingly.
3. Know your numbers inside and out. To successfully hit a 10% profit margin, you need to be intimately familiar with your numbers–sales, expenses, profits, etc. This means tracking everything and being able to accurately forecast future sales and expenses. Learn how your numbers are related, for example understanding food cost % in a brewpub or restaurant. This will allow you to develop metrics and KPIs for you to track so you can focus on what drives your business.
4. Have a solid business plan. Last but not least, having a sound business plan is essential for small businesses striving for a 10% profit margin. Without a plan, it will be difficult to stay focused and achieve your goal. This should include your purpose or mission, your values, your marketing plan, as well as forecasts and projections for your financial statements based on your budgets. While you may be the only one who looks at this at first, you will be running your business with a plan that is documented instead of just what’s in your head.
Small businesses need to aim for a 10% profit margin to break even and stay afloat. This number may seem daunting, but with careful planning and execution, it can be easily achieved. Here are four tips on how to do this: 1) Create a labor cap; 2) Set a budget and stick to it; 3) Know your numbers inside and out; 4) Have a solid business plan. With these tools, small businesses can make the most of their resources and achieve profitability without sacrificing quality or customer service.
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