How much profit should your business be making?
Many mission-driven entrepreneurs start out with a dream that’s about so much more than making money and, in many ways, that’s a fantastic thing.
Having a strong mission for building your business can be a recipe for success.
However, if you want to make an impact, you’ve got to know your numbers.
I fully recognize that you may not have been inspired to start a business because you were excited about financial analysis, but that doesn’t mean it’s not extremely important.
You can learn how to become financially savvy by investing time in it and potentially seeking outside support.
To be quite frank – I haven’t always loved the financial aspects of my business and I’ve often had to coax myself into sitting down and doing a deep dive into the numbers.
However, I’ve learned that when I do take the time to analyze my business’ financials it has led to broader strategic insights.
Knowledge is power.
If you’re an early-stage entrepreneur & not sure where to start, first determine your financial goals and analyze what your business’ profit margin should be. To do this:
- Determine whether there is a profit margin that is common within your industry – Understanding industry norms is a great place to start to give you a baseline understanding of what level of profitability is reasonable to expect.
- If you’re building an innovative new product or service, determine the profit model of companies that share similarities to your business or that serve a similar customer – For example, if you’re developing new, innovative software for universities, you could start by researching how website development firms are compensated or other software companies are compensated by the universities you would like to work with to give you a benchmark for what’ profit model would work.
- Another great resource to determine target profitability is the book Profit First – This book provides business owners a recommended plan for profitability based on the stage of their company. I encourage all business owners to think about aiming to become profitable ASAP, even if your ultimate goal is to work towards an acquisition.
- If you’re interested in reading – I personally do not feel it’s beneficial for my business to follow the recommended system of setting up multiple bank accounts laid out in the book. If it is something that could work well for you – fantastic! Go for it. Rather, I found the book’s high-level concepts and principles valuable and I know it’s been considered to be a helpful resource for many founders.
Pricing and profitability is one part art, one part science. The more data you have, the better.
To dive deeper into your financials, set up your accounting system to pull reports or collect data to pull together excel spreadsheets where you can analyze:
- Your current and projected revenues – Map out the growth you are targeting and monitor your progress towards your goal each quarter.
- A breakdown of your expenses – Understand the investments you’re making & analyze a target amount of strategic investments you want to make each year.
- Your projected cash flows – Cash flow is the lifeline of your business & can literally make or break you. Make sure you map out your cash flow and give yourself a healthy buffer in case you need it for a rainy day.
Finally, within your financial projections: break down how much you are going pay yourself and determine the amount of profit you want to reinvest in the business.
Still not feeling comfortable? I cannot emphasize enough that you do not have to do this alone.
Consider finding an accountant that specializes in working with small businesses or, if your operations are complex or you plan to raise money, consider finding a fractional Chief Financial Officer.
Think about your personal finances as well. In the FYSO accelerator, we talk about the importance of not being afraid to speak to a financial planner to develop an overall financial plan. Make sure you develop a plan to save for retirement if that’s an option you’d like to have later in life.
According to this 2019 study by the Transamerica Center for Retirement Research, 55% of self-employed professionals consistently are planning for retirement, 30% are saving from time to time, and 15% aren’t saving at all (yikes!)
Make sure you’re saving and doing it in the smartest way. Solid financial planning can make a massive impact in the long run through tax savings and compounded interest.
Last, but certainly not least: take into account your personal relationship with money. I’ve experienced first hand that many mission-driven entrepreneurs are shy about getting paid their worth. If this is something you struggle with, take the time to understand the root cause of any mental barriers you’re facing and work to move past them.
We need you in the game for the long run and, for that to happen, you need to build a business that is financially sustainable.
*Cue the ZZ Tops Gotsta Get Paid*