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Profit Matters

For many entrepreneurial businesses, the battle is real. There is a great deal of uncertainty in the future. Depending upon who you ask, we may be in a recession, headed for a recession, or coming out of a recession. Over the past 12 months, we have seen the performance of many businesses take a sharp turn downward. The most prominent question is – “Should I reduce labor costs to hit the profit target or try to ride it out?” Although capital plays the most critical role in this decision (if you have no cash, you have no option), there are best practices regarding profitability levels.


We typically measure profitability as a % of total revenue. If a client has a gross margin (defined as revenue less non-labor direct cost) that is less than 40%, we will often evaluate profit as a % of gross margin. That said, let’s take a look at where you should be.


You are on life support if you are below 5% of revenue. The business is most likely one hiccup away from disaster. Quick action is needed to increase profit, often in the form of labor reductions.


You are in critical care if you are between 5% and 10% of revenue. You should monitor the outlook of your business closely and make quick corrections as the market changes. A wait-and-see approach could put you on life support!


Congratulations, you are a healthy business if you are between 10% and 15% of revenue. Why does it take 10% to 15% to be healthy? In studying hundreds of businesses, we have found that this level is needed for many businesses to maintain healthy cash flow, repay debt and likely generate a distribution/dividend for the company's ownership. Keep in mind that Uncle Sam gets his chunk too!


Some rock-star companies can generate above a 15% profit. Great job! Make it while you can, as the market will typically shift and push you back to 10%.


As you read this, you may realize it is time for a business profitability check-up. If so, the Simple Numbers team is here to help. Feel free to reach out today and begin your journey to a healthier business.

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