The formula
Revenue = (fixed costs + target profit) ÷ gross margin
What it means
Of every pound you invoice, only the gross margin share is left to pay fixed costs and leave profit: the rest goes on the cost of what you sell. So the target is not divided by one, it is divided by the margin. At a forty per cent margin, every pound of profit demands two pounds fifty of revenue, and that is why raising the margin moves the needle far more than selling more.
How to work it out by hand
- Add annual fixed costs and the profit you want
- Note your gross margin as a fraction
- Divide the target by the margin
- Divide by twelve for the monthly target
What is worth knowing
One point of gross margin is worth far more than one point of sales. At a forty per cent margin with fifty thousand in fixed costs, moving the margin to forty-five cuts the revenue needed by more than twenty thousand without selling a single extra unit. This calculation also assumes the gross margin does not change with volume, and it often improves when you buy in bulk: in that case the real target is somewhat lower.