The Power of a Profit Target
Having a clear target is a powerful thing. A few years ago, I led my son’s scout troop to climb Longs Peak in Colorado. We hit the trail about 2:30 AM and watched the sun rise while sitting above the tree line. As we entered the most difficult stretches, we all struggled at different times. At times I remember doubting if I could go on. The altitude, fatigue and ground yet to cover all seemed too great a challenge. Then I would catch a burst of energy and carry on. I watched others go through the same struggles, we all kept each other motivated and continued on. We reached the summit around noon and were all thrilled with our accomplishment. Although completely exhausted when we made it back to the trailhead at 6 that evening, we had met our goal as a group. Once everyone knows what the outcome should be, the focus becomes clear and the desire to succeed can push the entire group on when the road becomes difficult.
If an outcome of your business is profit, then what is your profit target? How much profit do you need? What is your profit for?
Common uses for profit include debt reduction, building reserves, growth of the business, outside investments, gifts, profit sharing among employees and dividends to ownership. What is your target for each of these areas? Maybe you are buying the ranch from the previous generation or making mortgage payments on the place, maybe you want 1 years’ worth of operating costs in cash reserves, maybe you want to make enough to allow someone to quit a job taking them away from the ranch. What is your profit target and what is the timeline to achieve it? I’m pushing this because you need a specific number and timeline to make the target useful. As Dave Pratt said, “More is not a number, and someday is not a time.”
Once you have the target it allows you to work backward to plan your business. When Dixie and I purchased RMC from Dave and Kathy we established a profit target for the business. We knew what buying the business would cost and we established what our goals were for each area identified above. From this we built a profit target. I worked out what the overheads of the business would be and added the profit target to the overheads. Now we have a Gross Margin target. For us this tells us how many schools we need to do, the target attendance at each school, the scale of the Executive Link program and so on. Having a specific target empowers you to get to work creating a business that will meet these targets. What type of enterprises will you run? What is the gross margin per unit of these enterprises? How many units can you support with your existing overheads? If you don’t like the answers, then replan. Our plans for how RMC would look in 2020 took a drastic change with COVID, but we had our targets and we got to work making alternative plans. Maybe you need to change or fix the enterprise to produce a higher gross margin per unit, maybe you need to refine the business to run more units. Having the targets will focus management on which alternatives will produce the results you need.
I was privileged to see this in action last week. We recently completed our Economics Workshop where RFP alumni businesses came to Wheatland, WY and for 2 solid days we worked on their economic plans for the coming year. Two businesses in particular established their profit targets and worked backward to design their businesses based on the targets. It gave them specific targets for the scale of the business and what enterprise gross margins must be to achieve these targets. I fully expect both of these businesses will find ways to meet their targets. It likely won’t be what they come up with during the first attempt at planning it, but with a clear target, they will adjust and adapt to succeed.
If you don’t have a clear profit target with a timeline to achieve it, make one now. List out the uses for profit mentioned above and put your target next to each one of these. Total your profit goals and add in your overheads for your gross margin target and develop the plan to achieve it. If you are a member of RFP Online we have a lesson specifically for “Working the Numbers Backwards” under the “Economic Summary and Key Benchmarks” section.