It is often said that there are two ways to get ahead in the corporate world. Either you climb a congested ladder, muscling your way to the top, or you purchase your own ladder. For those who purchase their own ladder, being the boss is a refreshing alternative to answering to others who hold your financial well-being in the palm of their own hand. At least, with your own business, you only have to answer to you and your quarterly financial statement.
However, if your company has a CFO, then you might find that owning your own ladder did not bring a full end to others breathing down your neck. Your CFO is going to be there, every step of the way, shoving the numbers in your face. He might even tell you that your profit expectations are completely unrealistic. According to an article posted on ProfitGuide.com, getting a fresh set of eyes from a qualified CFO on board with your company is one sure way to improve projected profit expectations. Here are some additional ideas to think about to help you get those profit expectations into a more realistic range.
Margin and Markup
If you purchase a product for 2 dollars and sell it for 3-dollars, your markup is 50-percent. Unfortunately, your profit margin is not 50-percent. Confusing your profit margin as being 50-percent would be the same as saying you made a dollar-fifty profit on each unit of product sold when in reality all you made was a dollar profit. In this situation, your profit margin is only 33-percent. Simple math mistakes like these add up and often lead to improper calculations. This, in turn, leads to unrealistic profit expectations. If you don’t have a CFO to help you catch these mathematical mistakes, the burden is left up to you to figure it out. For some business owners, it can be refreshing to have a CFO breathing down their neck to ensure such mistakes do not financially wreck their company.[Tweet “Owning a #smallbusiness is challenging. Make sure you are setting realistic #profit expectations.”]
Overhead Costs Eating Away at Profits
Since operational costs tend to eat into profits, it is important not to forget that factors like product cost hikes, rent and employee earnings must be deducted from the profits being generated from product sales. Calculating and subtracting out such overhead operational costs becomes an essential part of determining where profit expectations will land. Although you may not be able to always make an accurate prediction of what your profits will be, you can, at least, err on the side of higher overhead costs to keep the figures in a more realistic range. If profits exceed the lower projections caused by your stated overhead impact, then you can be sure you are staying within reasonable boundaries and come out ahead of your projections.
The Unknown Factors Leading to Profit Loss
In the business world, there will always exist uncertainties that could potentially create profit loss for your company. For example, you bought way too much product and the products demand lags in the market. Being stuck with product and not be able to move it quickly will certainly impact your profit expectations by generating a significant lag in sales volume over long term projections. Alternatively, say your company invested in stock, but the stock plummeted. In terms of a loss of profits, this hit could be financially devastating. There is no guarantee that the stock will ever recover. Sometimes the best you can hope for in a situation like that is a decent tax write-off to mitigate the profit loss. Learning to calculate in such unforeseen factors as an expected loss will also help to improve your ability to generate realistic profit expectations.
Since the potential to overstate profit expectations is a very common problem with inexperienced business owners, it is always best to learn to be as conservative as possible with one’s projections. Business is done best by the numbers when the numbers are adjusted to ensure a realistic, rather than inflated, outcome. When the outcome is better than projected, then a business owner can feel more confident that their approach to generating profit expectations is operating in a healthy range. If their expectations are projected to be greater than the outcome supports, it is evident that the business owner is not taking into account all the critical factors for ensuring a realistic outcome by the numbers. Such a business will inevitably find itself neck-deep in financial woes.
Philip Piletic, originally from Europe, now situated in Brisbane, AUS where he works & lives. His primary focus is the fusion of technology, small business, and marketing. He would like to thank IdealPOS for their help with creating this article.