Working Back From Your Profit Target

Why Starting With Revenue Is Backwards

Most Melbourne business planning conversations start with revenue: "We want to hit $1 million this year." It sounds ambitious and might even be achievable. But revenue without a profit model is just a larger number to be stressed about.

A Melbourne service business turning over $1.2M with a 4% net margin ($48k profit) is in a much worse position than one turning over $650k with a 22% net margin ($143k profit). The first owner is managing more complexity, employing more people, dealing with more risk — and earning less for themselves.

The better approach is to start with the net profit you want the business to produce and work backwards to determine what revenue, pricing, and capacity are required to produce it. Melbourne's higher cost base makes this exercise even more critical.

The Reverse-Engineering Model

Four steps, in order:

1. Desired net profit — the amount you want left after all expenses, including your own wage
2. Required gross profit — net profit plus total overhead
3. Required revenue — gross profit divided by your gross margin percentage
4. Required pricing/volume — check the revenue figure against your capacity

A Worked Example for a Melbourne Service Business

Let's say you want $180,000 net profit from your Melbourne service business this year, on top of a $130,000 owner's wage (already in the overhead).

Melbourne overhead breakdown:

• Owner's wage: $130,000
• Staff (1 FTE at Melbourne rates): $85,000
• Rent, insurance, subscriptions, marketing: $35,000
• Total overhead: $250,000

Desired net profit: $180,000

Required gross profit: $180,000 + $250,000 = $430,000

At a gross margin of 45%: $430,000 ÷ 0.45 = $956,000 revenue

Check capacity. At $220/hr billing rate and 80% utilisation across 2.5 FTE, you have approximately 4,800 billable hours. At $220/hr, that's $1,056,000 — the numbers work.

But if you're currently charging $170/hr, you're looking at $816,000 revenue maximum — $140k short of what you need. The solution is a price increase, not more hours or more staff.

When the Numbers Don't Work

If the reverse calculation produces a revenue target beyond your capacity, you have three options:

1. Raise prices — same work, more revenue
2. Reduce overhead — cut costs without affecting delivery
3. Accept a lower profit target — consciously, with a plan to close the gap

In Melbourne's market, raising prices is often the most accessible lever. Melbourne clients are generally willing to pay for quality and reliability — the market supports higher rates than most business owners believe.

The Overhead Audit for Melbourne Businesses

Melbourne's cost base is higher than regional Victoria, but not every Melbourne overhead item is unavoidable. Run the audit:

• List every expense from your last 12 months P&L
• Mark each as essential, useful, or discretionary
• Challenge discretionary items first, then useful ones
• Look for subscriptions auto-renewing without being used
• Check whether any supplier or service contracts can be renegotiated

Most Melbourne businesses find 5–12% overhead reduction in an honest audit — even after accounting for the higher local cost base.

Capacity Planning: Understanding Your Melbourne Ceiling

Before committing to a revenue target, understand actual capacity. The formula:

Available hours × billing rate × utilisation rate = maximum revenue

A Melbourne service business with the owner and two staff, billing at 70% utilisation across 40-hour weeks, has roughly 4,200 billable hours per year. At $250/hr, the maximum revenue ceiling is $1,050,000. If the reverse-calculated target is $780k, you have headroom. If it's $1.2M, you need to hire first.

Hire vs Price: Two Different Problems

• Capacity problem: More demand than available hours. Solution: hire or subcontract.
• Margin problem: Enough hours, but rate too low to produce the profit needed. Solution: raise prices.

In Melbourne's market, margin problems are more common than capacity problems for service businesses in the $400k–$1.2M revenue range. Run the reverse profit calculation first to identify which problem you're solving before committing to any major decision.