Profit Goal Calculator

Starting from profit rather than revenue

Setting a revenue target and hoping profit follows is the common approach and it inverts the logic. Profit is the objective; revenue is one of the inputs.

Working from a profit goal means deciding what the business should earn, then determining what revenue and margin combination produces it. That frequently reveals that the required revenue is lower than expected if the margin improves, which changes the plan entirely.

The formula is straightforward: required revenue equals fixed costs plus target profit, divided by contribution margin. What it makes visible is that margin and revenue are substitutes, and most businesses only ever consider one of them.

The margin route against the revenue route

A business needing £70,000 of annual profit, with £96,000 of fixed costs and a 35% contribution margin, needs £474,000 of revenue.

Improve the contribution margin to 40% and the required revenue falls to £415,000. That is £59,000 less revenue for the same profit, achieved by improving the margin by five points.

Five points of margin is a substantial improvement and it is frequently more achievable than £59,000 of additional sales. Supplier negotiation, packaging efficiency, a price increase and reduced discounting can each contribute a point or two, and none requires finding new customers.

Tax, and the number that actually matters

A profit goal stated before tax is not the amount available. Corporation tax comes off, and then personal tax on however the money is extracted.

Someone wanting £70,000 personally needs meaningfully more than £70,000 of company profit, and the exact figure depends on the extraction method and the jurisdiction.

Which means the goal should be stated at the level that matters and worked backwards from there. Setting a pre-tax profit target and then discovering what it produces personally is the common sequence and frequently disappointing.

Reinvestment against extraction

Profit can be taken out or put back, and a goal that assumes all of it is extractable will fail in a growing business, because growth consumes cash.

A business growing 30% a year needs to fund 30% more inventory, and that money comes from profit. Extracting all of it means the growth has to be funded by borrowing.

So the honest profit goal is stated as extractable profit after reinvestment, which requires knowing the working capital requirement of the planned growth. That calculation is rarely done and it is the difference between a plan that works and a plan that runs out of money in a good year.

Reviewing it against actuals

A profit goal set annually and checked annually gives no opportunity to correct. Monthly tracking against a phased goal does.

The phasing should follow the seasonal shape rather than being flat, so that variance means something. Missing a phased November target is a signal; missing a flat one in February is not.

The review should also check the composition rather than just the total. Hitting the profit goal through unexpected margin while missing on volume is a different situation from the reverse, and each implies something different about what to do next year.

The goal also needs a floor as well as a target. A minimum acceptable profit, below which something structural changes, is a different number from the one being aimed at, and having both prevents the slow drift where a missed target becomes the new normal each year. Businesses that state only an aspiration tend to accept whatever arrives; those that state a floor have a decision point built in, and they reach it while there is still time to do something about it.