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I am often asked by entrepreneurs, "how much profit should my business be making?"
My answer is always the same: It depends.
It depends because I don't know how much money is invested in the business in the first place. The amount of capital invested has a significant influence on how much profit is enough.
Unfortunately, most of the people I meet who are the owners fast-growing businesses are mistakenly looking at the wrong metrics to determine the financial performance of their business. Quite often they may not be looking at any metrics at all.
And this is where growing a business comes unstuck.
A better measure of performance
You might be wondering, what could be a better measure of performance than revenue growth?
While strong revenue growth is important, there is a different and far superior question that every entrepreneur should be asking: What is my return on capital employed?
It's the ultimate question that all business owners need to know the answer to.
There is an opportunity cost of having money tied up in your business. After all, if it wasn't invested in your businesses it could be invested elsewhere.
As an entrepreneur, if all you are looking at is the profits you are generating, and not the money you have invested to achieve these profits, then you are missing a large part of the story.
To learn more about return on capital employed and how to calculate this for your business watch our two-minute video: The Ultimate Financial Performance Question Every Business Needs to Know.
Other common mistakes every entrepreneur should avoid
1) Not identifying the true cause of a lack of cash flow
It is very easy to spot a cash flow problem, but quite often it comes as a symptom of an even greater issue.
Lack of profitability and an unsustainable growth rate will manifest as a cash flow problem.
Many entrepreneurs jump straight to trying to fix the symptom, however they don't think about the true cause of the issue which could come down to profitability, unsustainable growth or even poor working capital management.
2) Chasing sales volume for the sake of it
For successful entrepreneurs, growing the business is always top of mind.
However, I often see entrepreneurs jump straight to growing sales volume without giving a second thought to margin.
While increasing your prices can be unsettling, often even a marginal price increase can give you a far superior overall result. Your customers may hardly know the difference.
Helping entrepreneurs significantly improve their financial performance
Is there a better solution to your cash flow woes? Could you achieve even more financial success with a slightly different strategy? Put your business to the test today and receive instant feedback.
Click here to see what My Catalyst reveals.
About Grant Field
Grant Field works as a business mentor and executive coach who helps aspirational business owners to accelerate their business growth.
Grant has personal experience having built and sold his own business for several million dollars.
He has helped more than 100 owners of high growth businesses to understand how to significantly improve their financial performance and business value.
He is also a partner at MGI South Queensland, an accounting and business advisory firm that specialise in helping family and private businesses achieve success.
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