Every business, small and big, should have a profit plan in order to drive the business towards success. Such a plan is even more crucial for new small businesses because it will help them stay on track and not fail midway. When you plan for profit, it helps you understand the various factors that contribute to your success. It will be a kind of summarized income statement in written, which will serve as your profit and sales objective, and as your business budget. Your profit plan can be used to evaluate the operations, determine additional resource needs (like employees or facilities), anticipate financing needs and plan your purchase requirements. With a well-planned business model, there will be an increase in the possibility of gaining profit right from the start.
A profit plan is advantageous to your business in that it helps in performance evaluation, financial planning, creating cost consciousness, maintaining a disciplined approach to solving problems and gaining the confidence of investors and lenders. To get a clear idea, make sure to research your business model before kick starting the business; about consumer price expectations, the competing products, and the cost of infrastructure, materials and potential threats. Following are the points to consider when you are preparing a profit plan:
Revenue – When you sell your products and services, what you get in return is the revenue. When the revenue increases, it eventually increases your profit. But there should be a well-chalked out process, which will ensure that there is no additional cost on you when trying to boost the revenue. When there is an increase in production for the purpose of boosting revenue, it can enhance profitability by creating economies of scale, or efficiencies that reduce the cost per unit when units are produced in bulk. For example, say, it takes about an hour to set up your machinery every day. Then the total labour costs will reduce much if 100 units are produced per day, instead of just 10 units.
Margins – A company’s profit margin is its gross sales percentage earned in profit. For instance, a business that has $100,000 sales and $30,000 profit, will gain a profit margin of 30 percent. A $300,000 business with a profit margin of 10 percent will earn the same profit amount as earned by a $100,000 business with a profit margin of 30 percent. However, the business that has a higher profit margin and lower sales will be in a better position to gain profit as the business grows.
Expenses – Profitability of a business can also be enhanced by cutting down the expenses and increasing the net earnings, after deducting the expenses from revenue. You will have to carefully research the cost of every item used by your business and look for other options of lower costs and comparable value. Evaluate the company payroll for situations like overstaffing, increased utility bills, increased rent and other similar expenses. Doing so can help you lower your expenses.
Comparison of Figures – To create a profit plan you need to prepare an income statement of your business’ actual costs and sales, and compare it with your profit projection for that year. The income statement will help you evaluate all the operations and pinpoint the areas of high and low business performance. When consolidating your profit plan, you also need to compare and review the past year’s profit and loss statements on monthly and quarterly periods to the current periods. This analysis will help you make necessary changes based on trends that you have been following, such as the increase/decrease in product sales at specific times of the year. Comparison of figures will also help you decide what new areas you need to invest in based on performance.
Profit Goal – Setting a target profit for the business helps in working towards a goal all through the year. In order to fix a target profit, you will have to consider the number of products sold, along with employee/owner salaries, fixed and variable costs and other operating expenses. You can also decide the target profit on the basis of the business’ current gross profit margin percentage. This value represents the total sales revenue percentage remaining after costs. Gross profit margin percentage is the main indicator of your company’s health and it shows whether the existing markup on products/services is enough for paying the expenses as well as for making profit. The higher the percentage, the better it is for your business. Make sure to review your monthly/quarterly profits regularly, while also monitoring the competitor and industry movements that could affect your company’s sales.
Changes – Being prepared for any kind of change is extremely crucial when you are in a competitive environment. Your business should be ready for changes in both internal and external factors, like pricing policies, staff changes, product cancellations, increase in supplier costs, general economic climate, client stability and so on. However, if in your business plan you set aside some capital for these unforeseen situations and manage to stay afloat, you need not be worried about being impacted heavily by such changes.
The bottom line is that the success of your business shouldn’t be left to chance. You should have a good profit plan that will ensure maximum profit and steady growth with each passing year. With the frequent highs and lows in business, even if your high profit goal isn’t reached, the profit plan will lead you in the direction of progress and ultimately bring success.
– Swathi Bhat