Profit Planning for Success in 2021
If yours is like most companies, you typically prepare annual budgets, or profit plans, for the accounting year. But with short term changes in the business climate still a reality of our future, it’s difficult to project for an entire year. And even if your company is growing, it’s challenging to accurately forecast for a year. Your profit plan also needs to consider the near term.
My solution is a rolling, 12-month profit plan which means re-forecasting the next 12 months each quarter. This allows you the flexibility to incorporate changes as they occur, yet you always have a one-year plan. Here’s how to create one for your company:
Start with your sales forecast—ALWAYS!
Sales are the lifeblood of business. Accurately forecasting sales is pre-requisite to developing a profitable cost structure. This is, and should be, where you invest substantial time and thought. It is important to include your sales team in preparing the forecast; their buy-in is crucial to reaching your goals. Forecast sales based on product, product line or profit centers. Recommended are no more than three to five revenue categories on the Income Statement. In its simplest form the forecast is the number of units to be sold (items, hours, services etc.) by time period (week, month), multiplied by the selling price per unit. Most current day accounting systems should provide the history for this calculation.
Organize your Profit Plan electronically.
Electronic spreadsheets, such as Microsoft Excel, provide not only organization of your numbers and projections, but also enable quick changes and updates to the Profit Plan. Details can be entered in individual tabs then brought forward, in summary, to the Profit Plan (aka Income Statement and the Forecasted Cash Flow). Any changes to the detail are reflected immediately in the summary.
Know the Net Profit you want to achieve.
Whether expressed in dollars or as a percentage of revenues, it is important to have a target for net profit. This can be based on company history, industry standards or return on investment calculation. Many business owners start this process without a target, settling for what the numbers project. By starting with your profit objective first, fine tuning the Profit Plan will most likely ensure that your business is, in fact, profitable!
Understand your true cost of sales.
Second to the sales forecast, knowing how much each sale will cost to produce and deliver is the most important forecast for Profit Planning. Surprisingly, many small businesses are not able to accurately identify this cost, primarily because the chart of accounts or accounting system is set up to prepare tax returns, not to operate the business. Identify all “direct” costs – those costs which will be expended only if you produce items or services to be sold. Direct costs include both labor and material and can become more complex if you have inventory of raw materials or finished goods. You may want to involve your accountant to help determine Cost of Sales; it is critical to understand these costs since, without adequate Gross Profit (Sales – Cost of Sales), net profit may be impossible.
Organize operating expenses.
For most companies, operating expenses will naturally organize into the following categories:
- Payroll, Taxes and Benefits
- Marketing Expenses
- Sales Expenses
- General and Administrative Expenses
- Finance Expenses
Using these simple categories will help organize your thoughts for preparing your forecast and evaluate the value and need for each expense in each category. You’ll begin to develop monthly and annual data for comparison and can more easily delegate preparation and accountability for each category.
Review, revise, reveal and report.
Revising your profit plan every 90 days is the same process as creating an annual profit plan but does not look as far out. Your focus for these short-term revisions should be on:
- Maximizing cash
- Staying in business
- Positioning yourself to move to the next level
When reviewing your Profit Plan every 90 days, include key members of your team in your review so each member understands their role in the overall success of the plan. Report your actual results against the Profit Plan monthly then, adjust stay on track.
These tips touch on the basic components but cannot possibly cover all the nuances of preparing your Profit Plan and related Forecasted Cash Flow. A rolling Profit Plan and Cash Flow Forecast, based on 90-day increments, can be your most valuable tools for financial success. Please contact me with questions about creating your Profit Plan or to discuss other financial needs of your company.