Is your profit margin at 20%?

So I was making some cold calls in a new-to-me industry the other day when I reached a business owner who asked me the following question:

                “Are you aware of what the profit margins are in this industry?”

Of course, not knowing the answer, I tried to fake it and ended up giving a lowball answer “Five to 8 percent??” I said, unconvincingly.

That was NOT the answer the owner was looking for, and the conversation quickly came to a close. In retrospect, I think no matter what answer I gave it was going to be the wrong one.  

A few minutes of Googling later and I had found a YouTube video from a consultant in this particular industry who said the average profit margin was around 10% — The consultant also stated that owners in the industry should set their sights on a 20% profit margin.

And then it dawned on me – a 20% profit margin be the target for every small business owner, regardless of the industry!

Let me say that again – every small business owner should be trying to achieve a 20% profit margin (EBIT).

If you are not currently delivering a 20% profit to your shareholders, what can you do to get there? The strategies are stunningly simple:

1. Increase sales.
2. Increase gross profit margins – courageous price increases and keeping the lid on the cost of goods sold.
3. Cut costs – this usually means personnel and facilities.

The tactics you need to employ to implement these strategies successfully can be a little more complex. But let’s keep it simple, here’s a plan for increasing sales by 33% for accompany that sells 1,000 customers a year (out of 5,000 leads) at an average sale of $1,000 per customer.

• Let’s raise the number of leads by 10%, from 5,000 to 5,500 (ramp up marketing).
• Let’s increase our closing ratio by 10%, from 20% to 22%
• And, let’s increase the average amount sold per customer by 10%, from $1,000 to $1,100.

Here’s the math, we were doing $1,000,000 a year in sales before (1,000 customers X $1,000 average sale); and now we are doing $1,331,000 a year (1,210 customers at $1,100 a year).

Say this business was earning an 10% profit on $1M in revenue ($100,000 EBIT), with $550,000 in COGS and another $350,000 in salaries and overhead. Now, at $1.331M in revenue (with same COGS and overhead), we are doing $248,950 in EBIT – a profit margin of 19%. Cut the GOGS and the overhead by a combined $17,250 and we are at our goal of 20%!

If you would like to have a discussion about how we can help get you and your business to 20%, call or text me at +13123754899 or visit my contact page.