Gross Profit Required for Target Profit

Why this comes up

Break-even tells you the floor, the GP level where the agency stops losing money. It doesn't tell you what GP level actually funds the profit the owner wants to take home, or reinvest, this year. That's a different, larger number, and it's easy to underestimate because fixed operating expense and any internal variable expense both have to clear before a dollar of target profit shows up.

How we calculated this

Required GP = (Fixed Operating Expense + Target Operating Profit) / (1 - Internal Variable Expense %)

Worked example, using the calculator's own defaults: $180,000 fixed operating expense, $60,000 target operating profit, and 5% internal variable expense.

Required GP = (180,000 + 60,000) / (1 - 0.05) = 240,000 / 0.95 = $252,632

Notice the required GP, $252,632, is more than the $240,000 sum of fixed expense and target profit alone, the internal variable expense percentage means every dollar of GP has to clear that variable cost first before it counts toward fixed expense or profit.

What this means

• The gap between required GP and the simple sum of fixed expense plus target profit grows as internal variable expense percentage rises; at 5% it's a small gap, at 20% it's a much larger one.
• This required GP figure is the number to hold the agency accountable to, not fixed expense plus target profit added directly, using the simpler sum will leave the agency short of its actual target.
• Feed this required GP into Active Temps Needed for Growth Target to see it as a headcount, which is usually the more actionable number day to day.

Limitations

This is a static target, it doesn't account for how internal variable expense might change as GP grows, a larger book sometimes carries proportionally more or less internal variable cost than the rate you enter here. It also treats fixed operating expense as genuinely fixed across the full range of GP being modeled, which breaks down if hitting the target would require a step-change in overhead, like a new branch or a back-office hire.

Common mistakes

• Adding fixed operating expense and target profit directly instead of dividing by (1 - internal variable expense %), which understates the true GP requirement.
• Setting internal variable expense to zero out of convenience when the agency genuinely has variable costs that scale with GP, like commission or bonus pools tied to gross profit.
• Treating this as a one-time calculation instead of rerunning it whenever fixed operating expense changes materially.

Frequently asked questions

What belongs in "internal variable expense %"?

Any cost that scales directly with GP rather than staying fixed, commonly commission pools, bonus structures tied to gross profit, or variable back-office cost that grows with placement volume.

Is target operating profit before or after taxes?

Before taxes; this models operating profit, not net income after tax and other below-the-line items.

How is this different from agency break-even?

Break-even solves for the GP that covers fixed cost with zero profit left over; this engine solves for the GP that covers fixed cost and still leaves your target profit on top.

Next decision

• Convert the required GP into required active temp headcount
• Check the break-even floor this target sits above