The e hustle 43: How to Work Out What Your Net Profit Needs to Be

I want to talk about my 'bottom' up approach to setting your business strategy.

There’s a very common problem that’s leading to ecommerce business owners not getting what they want from their business, and there’s a pretty easy solution.

Most businesses that I see set some sort of revenue targets - which is good. Then they’ll set some form or advertising budget with the hopes of achieving that target, which is also fine.

Then they’ll go as hard as they can to hit their sales target, and see what’s left at the end - the net profit. 

Typically, that profit will go back into running the business, or paying off debts, with maybe 25% to 50% of net profits being taken as dividends, which is why the main metric of any business should be to make as much profit as possible, in order to pay yourself as much as possible, in order to live the best life you can.

Instead of seeing what net profit washes out at the end of each month, you should swap that around and set your business up to run in the way that will meet your net profit goals - or, a bottom up approach to your business strategy.

Here's how to do it.

Set your vision for your life - your goals

Call it a vision board, call it manifesting, call it whatever you want, but every life needs a plan. Ask yourself how long you will give yourself to get to that state, and how much money you need to achieve that life.

For example, you might be married with kids, and you desire to buy your dream home in the next two years, and a holiday house by the beach in the next 4 years. So it’s likely that to afford that, you’ll need to be taking home at least $500k in wages and dividends. 

So in this scenario, we need a business that will pay us $500k a year.

Understand the Difference Between Profit and Dividends

Now its not likely that you’re going to pull out 100% of your profits, in fact you will be lucky to pull out 50%, especially if you are growing, because profits often need to go into growing your business. Let’s be generous, and say that you will pull out 50% of your company profits as dividends for you and any business partners.

So if we need $500k to live our best lives, and if that represents 50% of profits, then we need a business with an annual net profit of $1m (50% of $1m is $500k).

If you have a business partner, then you need to double it - So you need to make $2m in profits to each take out $500k. 

Look at Your Revenue Trajectory and Calculate Your Net Profit Target

Now you need to look at what your revenue forecast looks like for the next two years. Not what you want it to look like - what it actually looks like. In my coaching group, we teach brands how to forecast, because if your forecasting isn’t right, you have very little chance of taking control of your business destiny.

If your revenue forecast is say $3m per year over the next two years, then you’ll need to have a net profit of 33% in order to make $1m profit, and to subsequently pull out your $500k in dividends. If you have a business partner, you need to make $6m at 33% net profit. If you have 2 business partners…well, you do the math.

By the way, don’t let anybody tell you that a net profit margin of 30% is not possible in eccomerce - it absolutely is. 

Don’t be fooled into thinking that you’ll just ‘scale’ this business above $3m - think of your forecast as like the weather forecast, it predicts what your revenue will be, and when done correctly it’s usually right. You won’t just scale randomly past your forecast unless you do something very special…but that’s for another newsletter.

OK, so our net profit target becomes 33%. Remember that number, and we will come back to it.

Look at Your Gross Profit Margin

This is an easy one. Write down your gross profit margin. Let’s say it’s 60%. By the way, if you don’t know your gross profit margin, you really need to expect more from yourself if you want to run a multi million dollar business. 

Magic! Your OPEX Target Appears

So we have our net profit target of 33%, subtract that from our gross profit which is 60%, and we are left with an OPEX budget of 27%, meaning you need to budget to spend 27% of your monthly net sales (less tax) to run your business.

60% - 33% = 27%.

Take that OPEX target and split it out over your expenses to create a budget. For example, 13% on advertising, 10% on wages, and 4% on other expenses.

In Summary

To recap, we have worked out how much money we need to achieve our life goals. We have forecasted our revenue over the next two years, and we have set a net profit target based on taking out 50% of our profit as dividends. We have then subtracted our net profit % from our gross profit % to reveal our OPEX target, and we create a budget for our expenses that falls within that budget.

Remember, it doesn’t matter what I think you should be making, or any other coach. It matters what YOU want to take out of your business, from the bottom line. You set the targets, based on your life goals - not me. I’m just here to help teach you how to adjust your businesses to meet the goals set by YOU.

The brands that I work with that have achieved the most incredible results have all stuck to this system. It works. It’s incredible what you can do when you take control of your numbers, and stick to a framework.

Please try this with your business, and see how the numbers stack up. If you aren’t on track, you need to change. Don’t be fooled into thinking that scaling revenue at the expense of profit will somehow improve your life. Life is right now, not in five years when we hope we can sell for millions. What is your business doing to improve your life right now?

If you like frameworks and logic like this, you might like working with me. Apply here. 

Until next week,

Paul

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