7 Essential Tips for Profit Planning Preparation
In the past few articles, we’ve discussed the 4-step process for preparing the profit plan and the importance of having a profit plan for 2016. Have you identified your key 2016 initiatives that will impact your profit plan and/or cash flow? It’s still not too late!
Today, I’m going to get tactical and discuss several tips on preparing the Profit Plan. As you may know, it all starts with what you are going to sell and when you are going to sell it in 2016. History provides a starting point but in its absence an educated guess or crystal ball works to start the process. The sales forecast will be reviewed & refined several times during the Profit Planning process. To help visualize the finished product, I’ve provided a sample of a fictitious company’s Profit Plan that will demonstrate a number of my tips below.
Tip #1: Don’t focus on being perfect. Focus on being realistic.
The Profit Plan is a tool based on your educated forecast of what you want to happen with your business. If prepared properly, it will a valuable tool for driving your team to achieve the projected results. Most businesses get better on their forecasts over time. I have never seen a forecast where the projection and actual results were exactly the same.
Tip #2: Know the amount of Net Profit you want to achieve.
Whether the amount is in dollars or percent of revenues, it is important to have a target for net profit. This can be from the company history, industry standards or return on investment calculation. Many business owners start this process without a target – only to settle 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!
Tip #3: Use Excel (or similar spreadsheet) to organize the Profit Plan.
Electronic spreadsheets not only provide organization of the numbers and assumptions, but also provide quick changes and updating of the Profit Plan. The sample Profit Plan demonstrates how a typical one is organized. Notice that the details are entered in different tabs and then brought forward in summary to the Profit Plan (aka Statement of Income) and the Forecasted Cash Flow tabs. Any changes to the detail are reflected immediately in the summary tabs.
Tip #4: Start with your sales forecast….ALWAYS!
We all know that sales are the lifeblood of business. If we can’t accurately forecast our sales, how do we develop a profitable cost structure? This is, and should be, where a good deal of time and thought is expended. It is important to include your sales team in preparing the forecast…you will need their buy-in to get the results. Forecast your sales based on product, product line or profit centers. I like to see no more than 3-5 categories on the Income Statement. In its simplest form the forecast is the number of units (items, hours, services etc.) by time period (week, month) we will sell, multiplied by the selling price per unit. Most current day accounting systems should provide the history for this calculation.
Tip #5: Understand your true cost of sales.
Second to the sales forecast, this is the most important forecast for Profit Planning. How much will each sale cost me to produce/deliver? Surprisingly, many small businesses are not able to accurately identify this cost. Mostly because their chart of accounts or accounting system is set up to prepare tax returns, and not to operate their businesses. Take the time to identify all the “direct” costs to produce your sales. Direct costs are costs that would not otherwise be expended unless you were producing the sales product/service. This includes both labor and material. It gets more complicated if you have inventory of raw or finished goods. You may want to involve your accountant to help determine cost of sales. The reason understanding your Cost of Sales is critical is that without adequate Gross Profit (Sales – Cost of Sales) net profit may be impossible.
Tip #6: Organize your operating expenses.
Most companies operating expenses will naturally organize into the following categories:
- Payroll, Taxes & Benefits
- Marketing Expenses
- Sales Expenses
- General & Administrative Expenses
- Finance Expenses
Even if your current chart of accounts is not categorized as above, it is easy in QuickBooks and other programs to report them using these categories. Using these simple categories will help organize your thoughts in preparing your forecast; and, in evaluating the value and need for each expense in the category. Also, you will begin to develop monthly and annual data for comparison. As you grow, these categorizations will allow you to delegate the preparation and accountability for each category.
Tip #7: Review, revise, reveal and report.
After completing the first round of your forecasts, undoubtedly you will want to revise it for a number of reasons. Typically, the profit number is too low or non-existent. Continue to revise your numbers until you are satisfied your sales and profit are realistically achievable. Don’t operate in a vacuum for the review process….include key team members that will help make it happen. Reveal your plan to the entire team. For most businesses that does not mean the bottom line net profit. It does include sales and the key drivers for both sales and profit. It’s a team sport so the team needs to know their part in making your Profit Plan successful. Lastly, report your actual results against Profit Plan monthly. Make adjustments to stay on track with the Profit Plan and you level of success will be vastly improved.
These tips are just the tip of the iceberg….pun intended! One article cannot possibly cover all the nuances of preparing your Profit Plan and related Forecasted Cash Flow. Your business is unique and so will the details of your Profit Plan. Call me if you need help. Having a Profit Plan and Forecasted Cash Flow can be the most important tool for starting your financial success. Merry Christmas, Happy Holidays and a Happy, Prosperous New Year!