At the start of each financial year do we take time out to sit back and examine where the money comes from? We should!
The idea behind a profit plan is to inwardly reflect how you make money. It's part of working on the business rather than simply working in the business. This is an important concept. Working in the business is dealing with today's income or problems only. Working on the business is working on tomorrow's income. By preparing a budget or what I call a profit plan, is planning to succeed. Nobody is in business to make a loss. A profit plan is part of the overall business plan. It puts a target or goal in place broken down ideally into monthly, weekly and or daily targets and indentifying key performance indicators (KPI's). A KPI is something that has a major impact on your business. There are many factors affecting every business' performance, so it is vital to focus on a handful of these and monitor them carefully. By monitoring your actual performance compared to budget you can track the success of your business or identify problems earlier and as a result put steps in place to get back on target.
KPI's can be a number of things for example:
a) Number of business enquires each week
b) Conversion rate of enquires to sale
c) Average dollar sale
d) Gross profit margin achieved
e) Number of chargeable hours
f) Level of overheads
All of these KPI's measure the success or achievement towards the desired profit goal. If you can monitor it you can measure it. If the result doesn't measure up you need to do something about it. Any trends towards cash flow problems or falling profitability will show up in these KPI figures when measured against your profit plan. They will help you spot problems early on if they are calculated on a consistent basis.
By completing an annual profit plan you will benefit because you have thought about the problems of the future and tried to think about solutions to the potential problems. Perhaps a seasonal nature of the business. When applying for finance, or an extension to your overdraft, the bank wants to know if you have thought and considered how your business is going to operate in the period ahead. Have you undertaken some planning? Are you going to change the past results into better performance? How long will you be in overdraft?
The key is to plan. If you don't know where you are going, then any road will get you there.