A Profit Plan for Changing Times

Still facing unknowns as we enter 2022, a fluctuating business climate continues to be a reality within which we must work. With less predictability, it can be challenging to project for an entire year as you prepare your company’s annual budget, or what I like to dub your Profit Plan. Even if your business is growing, it is tough to accurately forecast for 12 months. Your Profit Plan should always consider the near term, but especially during changing times.

My solution is a rolling, twelve-month Profit Plan which reforecasts the next 12 months each quarter. The flexibility to incorporate changes as they occur is built in, yet you always have a solid – and realistic – one-year plan. Following are the steps to create this innovative solution for your company.

Start with your sales forecast.

Accurately forecasting sales is pre-requisite to developing a profitable cost structure, so this process warrants a substantial investment of time and deliberation. Include your sales team in preparing the forecast – their buy-in is crucial to reaching your goals. Start by forecasting sales based on product, product line, or profit centers. Include no more than three to five revenue categories on the Income Statement. In its simplest form, the forecast is the number of units (items, hours, services) to be sold per period (week, month), multiplied by the selling price per unit. Most current accounting systems will include the data that provides the history for this calculation.

Organize your Profit Plan electronically.

An electronic spreadsheet, such as Microsoft Excel, is a great tool for organizing your numbers and projections, while its flexibility enables quick changes and updates to the Profit Plan. Enter details in individual tabs then bring them forward, in summary, to the Income Statement and the Forecasted Cash Flow. Any changes in detail are immediately reflected 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 – which can be based on company history, industry standards, or return on investment calculations. Business owners who have no target often settle for what the numbers project. So, determine your profit objective first, then fine tune the Profit Plan to ensure that your business is profitable.

Understand your true Cost of Sales.

Second in importance to the sales forecast, is projecting the cost to produce and deliver each sale. To enable accurate identification of this cost, be sure the chart of accounts or accounting system is set up to operate the business, not just prepare tax returns. Identify all “direct” costs – those which you will incur only if you produce items or services to be sold. Direct costs include both labor and materials and can become more complex if you have inventory of raw materials or finished goods. It is critical to understand these costs since, without adequate Gross Profit (Sales – Cost of Sales), net profit may be impossible. Your accountant may be of help in accurately extracting these numbers.

Organize operating expenses.

For most companies, operating expenses will fall into the following categories:

  • Payroll, Taxes, and Benefits
  • Marketing Expenses
  • Sales Expenses
  • General and Administrative Expenses
  • Finance Expenses

Organizing based on these foundational categories will help evaluate the value and need for each expense in each category. You will begin to develop monthly and annual data for comparison and be able to delegate preparation and accountability more easily for each type of expense.

Review, revise, reveal and report.

Revise your Profit Plan every 90 days using the same process as creating the annual profit plan but don’t look out as far. For short-term revisions, focus on the following:

  1. Maximizing cash
  2. Staying in business
  3. Positioning yourself to move to the next level

Include key members of your team in each 90-day review of your Profit Plan so that each member continues to understand their role in its overall success. Report your actual results monthly against the Profit Plan and adjust stay on track.

Your business and its activities are dynamic – your Profit Plan should be, too! A rolling plan, built on 90-day increments, can be your most valuable tool for financial success.

The steps above illustrate the basic components of a Profit Plan but cannot cover all the elements – unique to your business – that are significant in its preparation and related Forecasted Cash Flow. I would welcome the opportunity to help you create or refine your own rolling Profit Plan. Please contact me to schedule a complimentary consultation.

Written by

Rick Arthur is a CFO whose expertise is built on Financial Intelligence and 35 years in senior financial roles. Coupled with a CEO’s perspective and the experience of building his own $20 million company, he brings a unique depth of insight into business from the top down. Wired to get to know people, Rick works hand-in-hand with business owners of intentional, growth-oriented companies, solidifying relationships as a trusted advisor and confidant to his clients. He leverages his experience to help business owners gain traction and stay laser-focused on the company’s vision, cash flow, and profitability – all while creating big picture solutions for strategic planning, growth and sustainable success.