Planning for profit is crucial for a small business to stay on track and understand the factors that contribute to its success.
Preparing for possible challenges and ensuring a maximum profit return are some of the benefits for small businesses that create a formal profit plan. But with the day-to-day competing demands of running a small business and seasonal cash-flow changes, it can be difficult to know where to start with profit planning.
Here’s how to create a simple and clear profit plan for your company.
Creating a profit plan involves preparing an income statement of your company’s actual sales and costs and then comparing that to your projected profit for the upcoming year. This helps you evaluate your operations and spot areas of high and low performance in the business.
When putting together your profit plan, review and compare the previous year’s profit and loss statements on regular monthly and quarterly periods to current periods. From here you can decide what adjustments you will need to make based on past trends, such as product sales increasing or dropping at certain times of the year.
You will also be able to anticipate the times where your business will have to invest in various areas such as staff hires or adopting the latest technology. A retailer, for example, might determine the need for additional staff to support higher sales volumes during the Christmas period. Meanwhile, an accountancy firm may invest in new online tools such as cloud accounting software in the middle of the year to prepare for the busy end-of-financial-year period. Consider also looking at gross profit percentages of other businesses in the same industry to determine how your company is tracking against the competition.
Setting a Profit Goal
Creating a target profit gives your business a set goal to work towards throughout the year. In determining your target profit, your business will have to consider the number of products or units sold along with fixed and variable costs, employee and owner salaries, and other operating expenses.
Your business may decide on a target profit based on its current gross profit margin percentage, which represents the percent of total sales revenue left over after costs. A key indicator of your company’s health, this percentage uncovers whether the current mark-up on products or services is enough to both pay for expenses and make a profit. The higher the percentage, the better – so if your company’s current gross profit margin is 15%, you may look to increase it to 20% or 30% in the coming year.
Ensure when creating a target profit that your business continually reviews its monthly and quarterly profit and keeps an eye on industry and competitor movement that could affect company sales. For example, if you spot a competitor that is selling similar products and services for a higher price, lifting your price points will help both compete and increase your profit margin percentage. On the other hand, you may opt for a different strategy such as reducing prices, which could generate enough additional sales to result in a higher gross profit.
Prepare for Changes
Ultimately, profit plans are based on estimates and your business must brace itself for external change factors such as client stability, increases in supplier costs and the general economic climate. Internal factors like staff changes, product cancellations and pricing policies can also affect your profit forecast.
However, if your business aims to reserve some capital in case any of these situations occur and keeps on top of trends and changes in its industry, your bottom line shouldn’t be heavily impacted.
With the right plan in place, your business will have a buffer in case of unforeseen circumstances, as well as performance goals to reach throughout the year as it works to meet its target profit.