Target profit: How to calculate and achieve business goals

Even the best team will struggle to succeed without a clearly defined goal. Established business metrics give employees targets to aim for. Even better, they inform strategy development, long-term objectives, and day-to-day decision-making. 

A target profit is one metric sales teams can use to guide operations. Upper management establishes a target profit based on estimated revenue generation over a predetermined period. This benchmark sets the bar for the entire department, allowing managers to calculate how many units they need to move daily or weekly to achieve success. 

Here’s what you need to know to calculate profit targets and build an ambitious, data-backed sales strategy.

What is a target profit?

A company’s target profit, also known as the target net profit or target net income, is a calculation forecasting how much revenue a company expects to make over a set period. This metric informs financial forecasts for the entire organization.

Accountants use market, sales, and expense data to establish budgets, estimate product development potential, and optimize investments. Still, a target profit is based on speculation, meaning actual profits may exceed or fall short of projections, depending on confirmed sales numbers, expenses, and other market factors.

How to find a target profit your company can achieve

Accountants can calculate reasonable profit targets based on existing sales and expense figures using cost-volume-profit (CVP) analysis. This simple analysis helps establish sales targets, identify the break-even point, and determine profitability levels, ensuring leaders craft informed metrics and realistic goals.

First, company leadership needs to know the break-even point. This figure represents the minimum earnings a business must generate from sales to pay for operating expenses.

Here is the formula for calculating the break-even point:

Break-even point = Fixed costs / Contribution margin ratio

Let’s break down each element of the equation.

Fixed costs

Fixed costs are expenses companies pay regardless of production and sales levels. These include:

• Rent or lease payments

• Salaries

• Utilities

• Insurance

• Loan repayments

Fixed costs impact the company’s profitability potential, making them an essential element of the target profit calculation.

Contribution margin ratio

This is the return a company earns from each unit sold, represented as a percentage of the total revenue per sale.

First, calculate the contribution margin by subtracting manufacturing and production costs (e.g., raw materials, shipping, and other variable overhead expenses) from the price per unit of the product or service.

Contribution margin = Total revenue – Production costs

Then, you can determine the contribution margin ratio. Simply divide the contribution margin by the total revenue per item, like so:

Contribution margin ratio = (Total revenue – Production costs) / Total revenue

A contribution margin ratio of 0.6 means a company keeps 60% of the money consumers pay per unit. The company makes $60 for every $100 in sales.

Break-even point calculation example

Now that you understand each part of the break-even formula, let’s calculate a hypothetical example.

Imagine your company pays $300,000 in fixed costs. Each unit costs $85 to make and is sold for $150. Here’s how you would find the break-even point:

Break-even point = $300,000 / (($150 – $85) / $150)

= $300,000 / ($65 / $150)

= $300,000 / 0.43

= $697,674.42

Therefore, your company would need to make $697,674.42 in sales before it earned any profit. Divide this number by the unit price to find the number of sales required to break even.

$697,674.42 / $150 = 4,651 sales

These numbers are useful for determining a reasonable target profit. Leaders can examine historic sales data, market trends, and other factors to determine realistic sales goals, then subtract break-even point sales to find a target profit.

Calculating sales targets based on target profits

If a business already has set a target profit, it can use the information from the previous calculation to calculate how many units it must sell to reach that goal. Here’s how:

1. Determine the timeframe, fixed costs, and contribution margin

First, leadership must decide how long the company has to attain its desired profit. Some companies measure profit targets quarterly, whereas others set annual metrics. After confirming the timeline and expected profit, accounting can determine the fixed costs for this period and calculate each unit’s contribution margin using the previously described methods.

2. Populate the profit target formula

The following formula determines the number of items a company must sell to attain its target profit goal. 

Projected sales = (Target profit + fixed costs) / Contribution margin per unit

3. Adjust

If this sales number seems unrealistic, team members may alter the target profit or adjust the unit price and production costs to generate a more favorable contribution margin. They can create multiple projections to determine the best- and worst-case scenarios.

Profit target example

Imagine you work for a company that makes sweaters. The company pays $160 to produce one sweater and charges $250. The CEO wants to earn a second-quarter profit of $180,000.

The finance department can use CVP analysis to determine the number of sweaters it needs to sell to meet that revenue target. The calculation would look like this:

To meet their profit target of $180,000, the team must sell 2,167 sweaters during the second quarter.

Optimizing profitability with Tempo

Gathering the data necessary to calculate target profit, contribution margin, and other financial metrics is time-consuming and labor-intensive. Tempo’s Jira-enabled applications allow businesses to monitor fiscal performance, control costs, and ensure product profitability automatically using real-time data analysis tools.

Tempo’s Timesheets simplifies cost allocation and labor expense management, while Financial Manager tracks revenue and expenses – on a project-by-project basis. Finally, Custom Charts for Jira brings it all together, delivering up-to-the-minute financial insights directly to your dashboard that save time and ensure report accuracy.

Try Tempo for free today to elevate your project management and achieve record returns.