Most small businesses do not have a business plan. The ones that do typically do not have a profits first business plan. That means just by adopting a Profits First business plan your company will be well on the way to one of the most successful companies in your market space.
Profits first is an easy concept. Choose a profit margin percentage and then make that happen in your business. The way you choose a profit margin percentage requires a little research. There are statistics available from the US Government which identifies profit margins by business category (SIC Codes). These statistics are available from the US Bureau of Statistics. The actual numbers are produced by publicly traded companies. As an example, in Electrical Contracting the profit margin statistics show the following:
Less than 1% Bottom 10% of businesses
1%-4% 20% of businesses
5%-8% Middle 40% of businesses
9%-12% 20% of businesses
Greater than 12% Top 10% of businesses
These statistics are based on the profit margins of publicly traded companies not privately owned small businesses. However, they can be used as a guide. If you make a choice to have a profit margin in the top 10% of all businesses in the Electrical Contracting field, your profit margin would need to be 13% or more according to the statistics listed above. So let’s choose a profit margin of 15%. That meets the goal of being in the top 10% of companies in the industry.
As a small business owner, if 15% is the profit margin you select, then it becomes a simple math equation. For a given period, the business generates $10,000 in revenue. Based on a 15% profit margin, the small business owner would then take $1,500 as the first expense that gets paid. I recommend setting up a special “Profits First” bank account. Then put that money away. Only after that money has been taken out and stored in a safe place, then pay your other business expenses with what is left.
This Profits First philosophy is a “hard discipline”. It is not easy to do this. The concept is easy to understand but actually living up to the commitment of doing it is a challenge. I hear it all the time from small business owners, “that will never work in the real world” or “I have bills that have to be paid” or “that will ruin my business.” It is difficult to do this. It is a challenge to manage the expenses for business. That is the job of a small business leader.