As the 2012 financial year draws to a close, it's a good
time to reflect on last year and highlight those things that went well and
those that may have impacted negatively in the pursuit of your goals.
It's also a great to spend some time re-evaluating your
personal and business short, medium and long term goals in the light of events
over the last year.
The achievement of your goals will in many cases be
dependent on setting and aspiring to specific financial targets. It's important
that recognise that many of your personal goals will require you to generate
sufficient business profits to fund those aspirations. Legitimate personal
goals will include, but are not limited to:
·
Providing appropriate educational opportunities
for your children
·
Reducing personal debts
·
Spending time on holidays and at other events
·
Upgrading the family home
·
Purchase of "toys"
·
Supporting your favourite charity
You may also have established business goals, which may
include:
·
Introducing new lines or services
·
Updating your shop with a new fit out
·
Establishing an on line presence
·
Reducing business debts
·
Moving premises
·
Selling the business
Now many of these goals will be part of a medium to long
term plan for your personal and business life - and it's amazing what can be
achieved by identifying, documenting and planning your life around clear goals.
Having clear goals provides you with the tools to enable you to benchmark
opportunities as you encounter them and determine whether, if taken advantage
of, will advance towards your end destination. In other words, they help filter
out the "noise" of short term gratification that normally derails you
from achieving what's important to you in life.
With this background in mind, this article focuses on the
short term financial plan for your business ie the coming 12 months. This is a
small cog in your overall medium to long term plans, which in effect is a bunch
of short term plans over the planning period. In my own case, I have developed
a series of one year plans for the next 5 years that are consistent with my
medium term goals. Having those plans in place gives me assurance that if I am
meeting those short term plans that I will achieve my ultimate goal - that those
goals are, in fact, achievable!
I would estimate that only 20% of SME businesses would set
themselves financial targets -and of the 20% that have financial targets, only
20% of those would set those targets in a planned, methodical way. Most would
simply take last year and add or deduct a %, without any analysis as to what
really happened in that year - although this is arguably better than having no
plan at all.
The Profit Planning Model
The diagram below identifies the key components of the
profit planning model that I utilise in building a profit plan for my business
clients. With minor reconfiguring it can be used for any business. With each
Key Performance Indicator (KPI), specific strategies will need to be developed
with the aim of achieving the targeted KPI.
Further, you must as best can be done, estimate where you currently
stand with these KPIs.
Number of Sales X Av. $ Sale = Sales Revenue Sales Revenue - Cost of Sales = Gross Profit Gross Profit - Overheads = Net Profit |
The profit performance for any business can be broken down
into these components and provides for some simple Key Performance Indicators
(KPIs) to be developed and monitored on a day by day basis. In other words,
it's much easier to influence these components (or KPIs) in a positive manner
to achieve a profit improvement than just saying "I want to improve
profit". This is because profit is simply a residual result of a number of
key business processes.
As you can see, it's a fairly simple formula - and the
actual numbers for each KPI targeted will vary depending on your chosen
business model ie the KPIs for a low price, high volume business will be much
different to a higher price, greater service model.
Let's have a look at each KPI:
Number of Opportunities: This is the number of
prospects that a business is able to attract. In a retail business, this may
simply be the number of people who walk in the door. Most businesses do not
measure this but it can be one of the most powerful numbers. In a sense it's a
reflection on the effectiveness of the marketing efforts of the business as well
as the quality of the customer service experience offered by the business.
There are many ways of measuring this KPI
Conversion Rate: This is a fraction of the number of sales made
divided by the number of opportunities. This is a reflection of many factors
but essentially an indication of the effectiveness of your selling systems,
customer experience and merchandising presented by the business. This is a
critical KPI for a business because if this is relatively low and the business
owner is unaware of this, a decision may be made to spend more on advertising
and marketing based on the presumption that more customers are needed. However,
by putting in place strategies to improve the conversion rate, profitability
can be improved substantially without the cost of additional advertising costs.
Again, very few business owners measure this because they don't measure the
number of opportunities.
Number of Sales: This
is simply the Number of Opportunities multiplied by the conversion rate
Average $ Sale: This is the $ size of the average
sale of a business. It is calculated by dividing the net of GST sales for a
period by the number of sales. Again, this KPI is impacted by the quality of
the selling experience, including merchandising, product knowledge of the team
as well as awareness of cross selling and up selling opportunities. You can
break this up into segments for the business as part of your of business
planning process.
Sales Revenue: This
is the result of multiplying the Number of Sales by the Average $ Sale
Cost of Sales: This
is the cost of the products that you sell. Your aim should be to minimise the
cost of sales as much as profit subject to the requirements of your business
model. Strategies here were outlined in my earlier article "Maximising
Your Gross Profit - Your Key to Business Success". Further, taking
advantage of prompt payment discounts and special deals on good, saleable stock
will ensure that you minimise your cost of sales.
Gross Profit: This
is the result of deducting the Cost of Sales from Sales Revenue.
Overheads: These
are the costs of keeping the doors open. In most businesses, these are
essentially fixed. Major overheads include wages, rent, advertising and buying
group/service fees. An assessment of these costs should be made in preparing
your profit plan for the coming 12 months. This assessment should include an
estimate of the likely impact the introduction of the carbon tax will have on
expense levels. Your budgeted expenses will also be determined by the business
model
that you are pursuing. That said, you should look at each of your expenses and determine whether they are adding value to your business.
that you are pursuing. That said, you should look at each of your expenses and determine whether they are adding value to your business.
Net Profit: This
is the result of deducting your overheads from your gross profit.
Next month, we'll look at an approach to preparing the
profit plan where we target a desired profit and build in the required KPIs
outlined above to make it all happen. In the mean time ensure that you start
measuring shop traffic numbers and your average $ sale in preparation for this
next step.
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