Not many would argue that developing an effective business plan regularly is a vital part of establishing the direction of a small business. However, many business owners (especially the new ones!) forget to look over the most essential part of setting up a business plan: The profit! Thankfully, there are a lot of resources out there that can help a new business put together a business plan and learn how to project future profits and losses. We also discuss how to manage profit and more importantly, how to make money as a new business in our free webinar training. For now, here are some tips on how to plan for profit now and in the future.
Accion provides an excellent overview of P&L (profit and loss statement) and what purposes they serve.
Before we jump into how to use profits, we should take a minute to clarify what profits are and how to measure them. Experts recommend all small business owners learn to compile and use a profit and loss statement (P&L). When in doubt on any of your P&L figures, it’s best to err on the conservative side so you don’t overcommit yourself to plans or projects that your company cannot afford.
P&L statements serve multiple purposes. First, they provide you with a clear snapshot of the current financial viability of your business. Second, they allow you to set budgets and project your future business earnings. Finally, your P&L can help you determine your gross profit margin. In basic terms, your gross profit margin is how profitable your company is. It’s the amount of money you have left over after you’ve paid all your bills and taxes.
Starting to turn a profit doesn’t mean you can take your hands off the wheel. You’ll need to closely track your profitability to make sure things aren’t slipping. You may also be able to spot ways to cut costs or increase revenues and boost that profit margin.
Note that average profit profits vary by industry. Talk to your financial advisor about what sort of profits a healthy business in your industry can expect. Once you’re turning a comfortable profit, your options for using it are pretty simple.
1. Keep your business plan up to date
After you get your business up and running and begin to make money, it’s essential to keep a business plan current. The Balance Small Business explains how to test the effectiveness of your business plan and securing financing if needed.
You did make a business plan before starting your business, right? Right? A business plan is vital for startup businesses for many reasons, including testing the viability of your business idea and securing debt or equity financing.
If you haven’t made a business plan it is not too late. Successful established businesses update their business plan annually to review accomplishments (or lack thereof) and decide on new goals or directions.
The financial health of your business is summarized by the income statement, the cash flow projection and the balance sheet, which are contained in the financial section of the business plan. From there you can determine ways to make your business more profitable by increasing sales and/or reducing losses or cutting expenses. If you want your business to be more successful you need a plan for how to get there.
2. Use business profits to grow a business
When you do start making money, Accion recommends for business owners to turn around and use that money to grow a business instead of spending it. It may seem tempting to spend the money right away, but it’s more important to save it and use it to further grow a business.
Before using profits to undertake business growth or expansion, it’s important to run all the numbers and check with your advisors. At this point, it would be useful to revisit your business plan. You want to project whether or not reinvesting your current profits and undertaking more costs will pay off in the long run. Expansion plans should only begin once you’ve determined that your company could handle the extra operating costs.
If you decide to go ahead with reinvesting your small business profits to grow your business, you have many options:
Perhaps you want to spend more marketing dollars to grow your customer base.
Or if you already have a thriving, growing customer base, perhaps it’s time to start new lines of businesses so you can upsell to existing customers or appeal to new ones.
There’s also the option of hiring more help so you can serve more customers.
If you have a brick and mortar business that would benefit from an expanded footprint, perhaps you can expand your space or move to a bigger location.
Consider also that you don’t necessarily need to have enough cash saved up to pay for a new location, equipment, or personnel. You might decide you’d prefer to use the financing to help you pay for those needs.
3. Cut business costs
Sometimes cutting business costs is something you’ll need to do, according to the Balance Small Business. Here’s how often you should cut expenses and why you keep this in mind.
Despite government claims of “low inflation”, business costs for everything from office space to vehicle expenses seem to be always on the rise, so keeping expenses in check is a crucial task for business owners.
Keeping track of expenses is time-consuming and tedious, so wherever possible use technology to make the job as easy as possible. For example, there are a number of mobile apps for expense tracking, including some of the newer cloud-based accounting applications that allow you to automatically add expense information into your accounting system by snapping pictures of receipts with your mobile device.
Annually or semi-annually review your major costs, such as office space, business insurance, staffing, and vehicle expenses. If you are in an area with abundant available commercial space, think about relocating, or if you don’t need a storefront convert to a home-based business.
Review your major supply costs regularly and always look for discounts or ways to pool supply purchases with other businesses to save money. Make reducing expenses part of your job description, and involve your employees.
4. Project future costs
There are ways to project future costs, as Chron points out. Project future costs and you’ll be less likely to spend more than you have.
For many small businesses, the marketing budget is one of the largest categories of expense. Marketing costs can be difficult to forecast because they are discretionary — the business owner can elect to spend more or less on advertising in the upcoming year for example. The company’s marketing strategies are broken down into specific steps or tasks that must be completed to implement them. The cost of each of these steps must be estimated carefully so that the overall marketing plan shows what actually must be spent to implement the strategies and achieve the company’s revenue goals. Inaccurate estimates of marketing costs results in a profit shortfall relative to plan — the company will end up spending more for marketing than was incorporated in the forecast.
In addition to predicting future costs, FreshBooks stresses how vital it is to create a budget. A budget will keep you in line with how much you can spend and where your money is going.
A great perk of creating a budget is now you will be able to factor in one-time purchases better than ever before. While some of these items may come up unexpectedly, like the purchase of a laptop to replace the one that crashed, others can be budgeted for months in advance, like that business retreat you’ve been eyeing, to protect your business from financial burden.
5. Set a profit goal
Before you make money, Quickbooks urges you to set a profit goal. A profit goal can help you determine your target profit and what you’d like to work toward now and in the future.
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.
Ready to learn more about how to secure profit and make your business succeed? Chat with us during our next free webinar training. Learn how to not only create an effective financial business plan but what steps you can take to ensure your business is successful moving forward.
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