If your revenues were $5,000,000 last year, what percentage of that number should make it down to the "bottom line" on your profit and loss statement?
Is it 25% ($1,250,000)?
Is it 20% ($1,000,000)?
Is it 10% ($500,000)?
And the big question: Do you have a target in mind for what percentage of sales should make it to your bottom line?
Let's start by defining the bottom line. For this purpose, I'll define the bottom line as pre-tax profits. Sales minus all expenses (but before income taxes).
In an S corporation or an LLC, this would be the amount that the owners pay income tax on.
Pre-tax-income is a very important number.
You should have a specific target set for pre-tax income as a percent of sales because it is such an important driver of your overall financial health (and your cash flow).
Having a target will help you make decisions about when to hire new employees. It will help you determine whether the business is under or over performing relative to the norm in your industry.
A good starting point in setting that target is to calculate the percentage for each of the last three years.
Then do the work to determine whether the percentage in prior years is acceptable or not.
If it's less than 10%, you likely have a problem waiting to be solved.
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