If you’re a business owner and you’ve been looking for ways to maximize your profits, the idea of only 2% profit growth may seem baffling at first. Why only 2%? Wouldn’t you want more? Why not aim for 20% growth? Or 50%? Or even more? It may be tempting to aim that high, but unbeknownst to many entrepreneurs, this can lead to extremely dangerous situations. 2% profit growth is your best and safest goal, and this week, I’m going to explain why that is in as much detail as I can.
Why Only 2% Profit Growth?
A while ago, I read an interview in Entrepreneur Magazine with one of the top CEOs in the country, and in it, he shared one of his many secrets to success. One of these secrets was that he aimed for a monthly growth rate of 2%. I’ll admit that when I first read this, I was genuinely surprised. 2% didn’t seem like much, especially for such a wildly successful businessman, but he went on to explain his reasoning: 2% profit growth is a reliable and sustainable rate, and keeping steady is the key to success.
2% Profit Growth is the Magic Number
Businesses fail for a wide variety of reasons, but there are two periods where they fail most commonly: When they first start out, and when they run into a sudden, massive success. While the specific situation for every business will likely differ, one commonality they share is that critical decisions will have to be made during both of these periods.
Failure towards the beginning makes the most sense, and even for someone with less experience, it’s not hard to figure out why. New entrepreneurs may have a lot of book experience—maybe they even went to business school—but there’s no substitute for real-world, practical experience. As a result, they’ll make a lot of rookie mistakes, falling into a lot of the same traps that new businesses often do. They mismanage their budgets, don’t put enough resources into advertising, or they just don’t properly leverage their connections. It’s easy to fail right out of the gate, but what happens when you find massive success very suddenly?
It’s here where we get back into why 2% profit growth is so important. When a business becomes wildly successful almost overnight, most entrepreneurs don’t know how to handle it properly. They try to grow quickly and recklessly, throwing too many resources into all of the wrong places, massively increasing expenses, hiring too many (or not enough) new employees, and generally creating unsustainable business models. In this way, success can actually spell doom for a business that isn’t ready to handle it. Growth is good, but the more rapid the growth, the more you run the risk of losing control. Slow, steady, sustainable growth is the way to go. Now, that 2% profit growth margin should make a lot more sense.
Achieving 2% Profit Growth
As a general rule of thumb, small changes are always easier to implement than big changes. Thankfully, big changes are made up of small changes, so set your sights on the finer details inevitably pays off.
With this in mind, you can start to implement a growth plan based on several individuals, smaller changes. Do whatever you need to do to reach that 2% goal. Cut expenses by 2%, put 2% more into advertising, work on boosting sales by 2%, and so on. Over time, as you get the hang of balancing the numbers, this process will get easier, and you’ll be able to hit your target growth with ease.
Reaping the Benefits of 2% Profit Growth
2% profit growth per month may not seem like a lot, but nothing could be farther from the truth, even in the long term. Looking at the math, it’s understandable why somebody would think 2% profit growth per month would lead to 48% growth over two years. However, this number is wrong. This formula is actually compound, and you make 2% off of each month’s growth, not just the first one. Over two years, your growth will actually be closer to 161% if you do things correctly—trust me, I’m a CPA, and I did the math. That’s more than double your profits over two years, and it’s all done at an easy, sustainable rate. Slow, steady, controlled growth that you and your team can handle will get you much farther than an overnight explosion in growth.
More than profit, a business benefits most from stability. Having a growth plan and sticking to just 2% a month strikes an ideal balance between increased profits and a sustainable business plan. Maximized profits are never fully maximized without longevity. If you stay the course and maintain slow, steady growth over a period of several years, you’re virtually guaranteed to get the most out of your business, and a few decades down the line, you’ll have a massively profitable business that’s also stable.
If you need help making the initial calculations, I highly recommend the planning guide in my book 90-Day Profit Reset: Gain Your Independence from Reduced Cash Flow, Evaporating Customers, and Shrinking Margins, which offers numerous tips, tricks, and advice for maximizing your profits. The guide will help you reach your target growth while simultaneously teaching you how to build up business habits that make you successful. You can pick up a Kindle or paperback copy through Amazon.
In essence, while 2% profit growth may not seem like a lot on the surface, it’s actually one of the best options at your disposal, offering profitability and sustainability in equal measure. Sticking to the right growth plan won’t just lead you to success—it will also make sure you’re fully prepared for success when it finally comes your way. Going forward, I hope you keep this in mind.