Overcoming the hurdle of true profitability
In the early years, we stumped through business growth. Rather than waiting to iron out the wrinkles, we tried a variety of things and adjusted constantly. In hindsight, the strategy was simple: Survive and don’t repeat the same mistakes. While the business grew, we didn’t have a clear picture of what we were aiming for. Not only was the vision vague, the path to get there wasn’t clearly defined.
We all have hopes and dreams of what our business will become. Whether we enjoy the path of solopreneur or we hope to build a business that outlives us, there is likely a larger vision at work. For us, there was regular talk of a boutique team of creative, talented professionals doing work we love. We’d done some back-of-a-napkin calculations and determined a 20-30 person team would be a sweet spot for the business. It wasn’t until years later however, that we moved off the napkin and started putting actual numbers to vision.
From revenue needed per team member to exact number of sales, we developed insight into the number that propel our business forward. It was then that the vision truly began to come alive and our business began to thrive.
What’s your vision for the team?
This will evolve over time, but use today’s vision as a benchmark. Where do you see the company heading? Don’t get lost in the details.
How big is your team?
How much will you pay each member annually?What benefits will you include?
Once you have a number for team size, how much you’d like to pay them, it’s time for a basic calculation. Multiply team size by annual compensation. Assuming they’re full time, you’ll need to multiply that total by 15% for employer payroll taxes. Now, the result should be an annual revenue number that will at least allow you to pay your team.
For example, if I’m imaging a 10 person team with an average salary of $60,000 then I’d need to generate $690,000 just to pay my team.
You can factor in overhead and profit, but it might help to keep things simple for now. For most businesses, payroll is there largest expense so starting there usually sets pretty realistic expectations.
Where are you today?
It’s time to figure out how far you have to travel. Knowing where you’d like to be, figuring out where you are today is key to calculating the gap.
What is this year’s projected revenue?
How many ‘units’ will you need to sell to get there?
Extending the example above, building a team of 10 with an average revenue per sale of $10 and you’d need to sell 69,000 units. If you’re a service company with average revenue of $10,000 per sale then you’d need less than 70+ sales per year.
What’s the Gap?
Subtracting your revenue today from the revenue of where you want to go and you’ll see the gap. This paints a realistic picture of far you need to travel for your business to align with your vision.
How many more sales will it take?How much would increasing your prices help?
Using actual numbers to highlight the difference between where you are and where you want to be will ensure things are clear and actionable.
Fill the Gap.
Once you’ve articulated your vision, assessed where you are today, and understand what’s missing, it’s time to take action.
What are you doing that needs to stop?
What do you need to start going?
What changes move the needle?