Changes in market condition require more focus on gross profit. Businesses need to plan for profits. The best way to end each year with a sizable profit margin is to focus on the income statement’s top line: sales.
When a company puts its efforts into forcing costs down to balance the budget, it can neglect the money-making area of the business. For the best bottom line, companies must prioritize from the top down. If your market changes or you lose a large customer then cost reduction is your survival plan. Eventually, growing your top line should be your long term priority.
And this priority must be a priority for the entire employee body. Sharing itemized profit planning goals and asking employees how they can contribute to the goal will get the ball rolling. The overall synergy created by processes and company-wide communication will make the profit plan part of the company culture. Increasing sales will be a driving force throughout the company.
For instance, the salespeople will talk to the managers regarding training needs. Operations employees will suggest how a tool or new process could improve their productivity. The accounting department will get together with the sales staff to discuss contract terms. The exchanges will go on and on until the synergistic force of teamwork, organized processes, and communication creates record sales.
How do you get the profit planning process started? First, determine a schedule or format of the budget and assign someone to assemble the numbers and produce the documents. Each department can prepare a budget.
Second, develop a realistic sales goal that also projects realistic costs. To calculate the sales goal needed to reach a profit goal, use the numbers from the most recent 12-month income statement.
Revenue/Sale Goal = (Operation Profit Goal + Fixed Expenses) ÷ Contribution Margin
The way this formula works is that revenues automatically cover your variable costs and your contribution covers all of your fixed costs plus your profit.
Profit Planning is essential to achieving sustainable growth. Contact Holt Marketing and Management Services today to get the right plan started for your company!