Streetwise: You can’t afford not to have a profit plan
From our friends at Eure Consulting:
It’s January again, which means it’s the time of year where everyone is making resolutions and setting intentions for the New Year. One of the most common resolutions is to lose weight. People always want to eat better and to exercise more. What if your company needs a wellness overhaul too?
In order for your new year’s resolution of losing weight to work, both your diet and your exercise routine have to work together. It’s a simple formula, you have to eat fewer calories at mealtimes than you burn in your workouts. Every company follows a similar formula for profit. You have to earn more money than you spend.
But, just like the majority of New Year’s resolution-makers the other 11 months of the year, some companies aren’t paying enough attention to what’s coming in and going out every month. If I asked you how much money your company plans to bring in next month, would you be able to tell me?
Every business, no matter how small, should track its income and expenses by creating a profit plan. You should know exactly where your money coming from and where it is going. If you don’t, you are flying blind and you won’t be able to effectively respond to crises.
What is a profit plan?
A profit plan is the art of projecting how much income you will generate each month, how much it will cost you to produce your product or service each month, and how much it will take to run your business. It’s understanding what’s coming into your company and what’s going out. The same criteria you’d be paying attention to if you are trying to lose weight.
If a better diet and more exercise is your wellness plan for a healthier you, think of your profit plan as your wellness plan for a healthier company.
A profit plan is simply a way to help you make better decisions and to keep you focused on what it will take to make money.
Just looking at your profit and loss statement at the end of the month does not cut it.
If that is the only data you are using to make your decisions, you have no way of proactively managing how you make and keep money. A profit and loss statement is what’s called a lagging indicator, it only tells you what’s already happened. You need to focus on leading indicators in order to proactively affect outcomes instead of just reacting to what’s already happened.
Using the Pareto Principle, you should be intentionally spending 80% of your time focused on driving top-line revenue and 20% of your time controlling the expense side of your business. By doing so you will start to see an impact on your bottom line.
It’s easy for business owners to get caught up in just managing the costs of their business. When money gets tight the simple solution is to cut costs. To stop doing certain activities. The quick solution is to decide not to spend money on large ticket items like a website, marketing materials, and/or training. But this cut first, analyze later approach is a symptom of only relying on lagging indicators.
Cost-cutting measures might make the P&L look better at the end of this month, but what opportunities will you be missing out on in the future, by not investing in your company now?
If something will help you generate money, you need to make it a priority. You may need to get creative in how you make that idea a reality, but you can find a way to make it work.
An annual profit plan will help you identify your marketing and sales strategies well in advance. You’ll have a plan on how you are going to land the next client, make the next sale, create a new product, or gear up for that trade show. By stepping back to look at your business a year in advance, you will constantly keep yourself focused on driving top-line revenue.
A wellness plan tracking calories in and calories out can help you live a long and healthy life. Your profit plan can do the same for your company.
It’s not sexy, but your bottom line depends on it
Numbers aren’t sexy and sometimes they can be uncomfortable to look at because numbers don’t lie. You might not like digging into the details, but as a business owner, it’s your job to understand the numbers. Inside and out.
You can have a bookkeeper help you organize your books. You can have a CPA prepare your taxes. But if you, as the business owner, don’t understand exactly where your money is coming from and where it is going, you are not taking care of your business and you will pay the price.
To begin creating a profit plan for your company, start with your income projections, then figure out your cost of goods in order to determine your gross profit, move onto expenses and then figure out your net profit. This will give you a baseline understanding of your company’s “caloric” balance.
Then you need to dig in and decide what your core money-making areas are and create a plan to capitalize on those areas. You need to determine what you think your biggest areas of growth are and don’t shy away from investing in them. When things get tough, you might have to divert funds from other areas, but don’t just panic and start making cuts across the board. Taking the time to make these decisions at the beginning of the year will help you avoid just that.
Profit planning will make sure that you keep your company focused on growing profits throughout the year. It will make you more proactive and less reactive so that you can respond effectively when times get tough. You’ll know what areas you can afford to cut back in and which areas you must continue to prioritize because you’ve already thought it out.
Goal: Make more money. Tactic: 20 minutes a week
Here’s the challenge: Carve out just 20 minutes a week to spend on reviewing your profit plan.
If you want to get fit you carve out time every week to exercise, right? Getting your company fit financially will require you to rewire your thinking and put an emphasis on managing your own profit plan. You will have to make this a priority. And if you do make it a priority, you’ll make more money.
If you get up every morning and just start running your business without some type of plan for continued growth and success, then your business is running you.
Take charge of your business by creating your own proactive profit plan and watch your business exceed your expectations.