Set Your Course for 2018: Tips for Preparing Your Profit Plan
2018 is just around the corner and you can start the year off right by preparing a profit plan. It’s a critical component in charting the course for your business in the coming year. Begin by identifying the key business initiatives that will impact your profits and/or cash flow. Then, determine what you are going to sell and when you are going to sell it, either based on history or an educated guess.
This sales forecast will be reviewed and refined several times during the profit planning process – which will be less daunting if you keep a few tips in mind:
Be realistic – don’t worry about perfection.
The Profit Plan, a valuable tool for guiding your team to achieve projected results, is founded on an educated forecast of what you envision for your business. Few forecasted projections and actual results are exactly the same. And most businesses become more accurate with their forecasts over time. So aim for accuracy but don’t stress if you have no crystal ball.
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 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 Statement of Income) 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. Take time to 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.
After completing the first round of forecasts, you’ll undoubtedly want to revise it. Typically, the profit figure may be too low or non-existent. Continue to revise your numbers until you are satisfied that your sales and profit are realistically achievable. For most businesses that does not mean bottom line net profit; it does, however, include sales and the key drivers for both sales and profit. Include key members of your team in your review and share your plan with your entire team so each member understands their role in the success of your Profit Plan. Finally, report your actual results against the Profit Plan monthly then make adjustments to 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. The details of your Profit Plan are unique, as is your business. A Profit Plan and Cash Flow Forecast 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.