If you’re like many entrepreneurs, you set business goals based on revenue targets.
You’re not alone. Consider the Inc. 5000 list, which ranks the fastest-growing companies in America. Its metric is percentage revenue growth, year over year.
And revenue-based targets are great, unless your costs are so high that you are losing money, or toiling away nights and weekends for a low single digit net profit margin.
Let’s level set.
While you as Entrepreneurs for Impact are running a business to make positive impacts in the world, you also need to make good money, or there is no business.
This is the truest definition of “sustainability.” While I teach graduate courses on this topic at Duke and UNC Chapel Hill, and corporate sustainability is a big driver of shareholder and stakeholder value, the literal definition is something like this: “Can you sustain what you’re doing for a long period of time?”
Whether it’s a business or the planet, this definition matters.
(Although I recognize that “sustainability” may not the best goal ever created. For example, would you aspire to define your relationship with your wife or kids as “sustainable.”)
Better than revenue targets, most businesses (aside from those targeting venture capital) should focus on profit margin, with the following prioritization:
Gross profit margin = Revenue minus ONLY the variable costs, or Cost of Goods Sold.
Operating profit margin = Revenue minus variable costs, or Cost of Goods Sold (COGS), and fixed costs, such as executive salaries, advertising, rent, and insurance (aka, the dirty “overhead” word).
Net profit margin = This is how you pay yourself (beyond a mere salary) and your shareholders.
As such, Company A with $1M in revenue but $300,000 in Net Profit may be more attractive than Company B with $5,000,000 in revenue but $100,000 in Net Profit. But the revenue numbers wouldn’t tell you that.
(Of course, net profit margin is just one of many variables that you’d use to decide which type of company you’d want to create, invest in, or buy.)