Here's Exactly How to Calculate Your Top Line Sales Goal

 Most business owners start with a sales goal:

"I want to hit $500,000 this year."

"I want to become a million-dollar business."

"I'd love to double my revenue."

This is how we all learned about forecasting revenue for our businesses. But it’s wrong. Setting your top line sales goal like that is how you stay broke and operating with nothing to scale.

Instead of setting much revenue we want to generate first, we should first figure out how much it costs to operate the business we are trying to build.

Step 1: Add Up Your Annual Expenses

The first step is calculating what it actually costs to run your business for an entire year.

Include your owner salary, employee payroll, loan payments, rent, software subscriptions, supplies, insurance, taxes, marketing, cost of goods sold, and every other recurring business expense. This number represents what it takes to keep your business operating before a single dollar of profit is earned.

Many business owners skip this step because they assume they know their expenses. I have found that writing each category costs down individually often uncovers expenses that have been forgotten or underestimated.

Step 2: Add Your Profit Margin

Once you know your annual operating expenses, decide how much profit you want your business to generate.

In my examples, I typically use a 50% profit multiplier because I believe businesses deserve enough margin to hire employees, build cash reserves, invest in equipment, weather slow seasons, and continue growing. Profit should never be whatever happens to be left over at the end of the year. It deserves a place in the budget from the very beginning.

Step 3: Calculate Your Top Line Sales Goal

Now add your annual expenses and your desired profit together.

For example:

Annual Expenses: $354,555

Desired Profit (50%): $177,277

Top Line Sales/Income Goal: $531,832

Instead of choosing a sales goal because it sounds impressive, you now have a number supported by the financial needs of your business. That goal can be broken into monthly, weekly, and daily targets, making it much easier to monitor your progress throughout the year.

I have found that many business owners set sales goals first and hope the expenses work themselves out later. Unfortunately, that often leads to growing revenue without improving cash flow. Owners find themselves borrowing money and digging a deeper and deeper financial hole.

Final Thoughts from Your Favorite Accountant

Before setting your next annual sales goal, calculate what it actually costs to operate your business for a year and build your profit into that number first. Your sales goal will become far more meaningful because it is based on the business you are building, not just the number you hope to achieve.

Because at the end of the day, positive cash flow isn't luck, it's strategy. And it's my goal to make that strategy as simple as possible for you.

Download the Cost of Labor Worksheet to calculate your top line sales goal with confidence.