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On Target Group Coaching
Your Profit Plan On Target Group Coaching
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Your Business is an Investment to Make Money
Let’s start by looking at three of the key financial indicators of your business’ state of health. Business is about making money. To do this, it must simultaneously increase three things: Net profit margin – operating profit margin Cash flow, and Return on investment (ROI) What do they each measure and what can it tell us about how the business is performing? And, why do they need to increase simultaneously? Let’s take a look at each of these ideas in turn. To do this, you must simultaneously increase three things: Net Profit Cash flow Return on Investment (ROI)
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How To Calculate Profit Margins
Net Profit Margin is your after-tax net profit divided by net sales and shown as a percentage. What it shows is the manager’s ability to carry a dollar of sales down to the bottom line as profit for themselves or the shareholders. In other words, NP% refers to the proportion of a dollar actually left to the owners from a dollar of sales after ALL expenses and taxes have been paid. It is a Profitability Ratio – one of a group of ratios that help us to judge how good the firm's profit performance is. When you look at it the question to ask is ‘could I have reduced the expenses that went into driving that $500K, or whatever, worth of sales?’ This would, of course, immediately increase net profit without requiring any outlay. In your group you will develop benchmarks to determine if your NP% is in the ballpark. If it turns out this is not a reasonable return margin we can then work with you to analyze where the costs are coming in and ways of reducing them. Gross Profit Margin (GP%) is profit derived from work produced divided by Gross Revenue Gross Profit Margin = (Gross Profit/Revenue)% Net Profit Margin (NP%) is after-tax net profit divided by Gross Revenue Net Profit Margin = (Net Profit/Revenue)%
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Key Profit Drivers Price Volume of sales Variable costs Fixed costs
So let’s get into it. To frame this session, let’s remind ourselves that there are only 4 things that you can work on to improve your profit. Price Volume of sales Variable costs Fixed overheads Let’s see how you can manipulate these to improve profit and also discuss which combination is appropriate in which circumstances. Work with these Key Profit Drivers to improve profitability Focus on the areas where most potential increase in profit is possible Price Volume of sales Variable costs Fixed costs
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Pricing Strategies You can increase profit by increasing price as long as you don’t lose so much business that it reduces your net profit You can increase profit by decreasing price as long as you increase volume enough to achieve your net profit
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How Much Additional Volume Do I Need If I Cut My Price?
Volume Increase To Give Same GP Price Decrease
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Discount Price by 10%
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What Volume Can I Afford To Lose If I Increase My Price?
Similarly, we can examine the impact of a price increase. In this case, if your gross margin was 30% and you increased your prices by 8%, you could afford to decrease volume by 21% (based on ‘average sale value’ to customers) to give you the same gross profit. In other words, you could afford for 1 in 5 of your ‘average’ customers to go elsewhere as a result of the price increase. If you’d like us to run this exercise for your business, let us know. We have a full set of pricing tables so that we can work with you to examine various options. Price Increase Volume Decrease To Give Same GP
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Increase Price by 8%
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Working On Volume Of Transactions
Profit Improvement Strategies Working On Volume Of Transactions You can increase profit by increasing volume of sales provided that price remains constant so that the increase in volume translates in higher gross profit OR You can increase profit by decreasing volume of sales provided that the resultant saving in costs outweighs the reduction in gross profit arising from the decrease in volume The second way of increasing profit is to sell more. If you do this, you need to ensure that price remains constant so that you get the benefit of the increased volume. Alternatively, so-called ‘downsizing’ is sometimes an appropriate strategy, where volume is reduced so that costs can be reduced. Of course, in this scenario, careful planning is required to ensure that the saving in costs outweighs the reduction in gross profit arising from the volume decrease.
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Cost Strategies Increase Gross Profit by reducing Direct Costs
Labor Materials Keep Variable costs equal or below the rate of increase in sales revenue Achieve greater productivity from resources that are financed by Overhead (Fixed) Costs
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Cost Definitions You will remember from Module 2 that there are two sorts of costs of which you should be aware: Variable costs: these are defined as those costs that vary directly with sales revenue. In other words when sales rise or fall, they rise and fall. A good example would be sales commissions payable. Fixed costs: these are costs that are incurred irrespective of whether or not any sales are made. They are usually associated with the physical capacity of the business to provide its service to customers. Direct Costs: Costs directly related to the production of revenue. Variable Costs: Costs that can vary directly with sales revenue. Generally related to production but not a direct job cost Fixed Costs: Costs that are incurred whether or not any sales are made. Overhead (General & Administrative) Costs: These costs are generally fixed but some may be variable as well
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Increase Gross Profit Margin
We find that most businesses have some room in which to move to improve this figure and some changes can be quite simple and straightforward. For example, you can train your team members so that they are more efficient in dealing with your customers, which in turn will mean your customers will buy more from you. You could also implement a system to find out from your customers what aspects of your business are important to them so that you can better meet their needs. This will mean they come back to you more often and they will refer you to their friends and associates. You can negotiate better trading relationships with your suppliers, which in turn may result in less stock being carried, or better buying prices. You can install more effective and timely performance measurement systems to give your team members better and faster feedback on how they, and therefore the business, is performing. This will enable you to quickly identify the root cause of emerging problems and take appropriate corrective action. All of these we refer to as ‘business development’ activities – something we in this firm specialize in. And if you thought those examples were so self evident that you wouldn’t benefit from getting some professional advice – well, reserve judgment until a bit later when we cover the use of some special techniques of business activity analysis that can really make an impact on your operations. Next, let's look at the second key performance indicator – Cash Flow. To improve the Gross profit margin you need to work on these drivers: Pricing & Estimating Material Costs Labor Costs Production / service delivery processes Customer relationships Team Skills and Development
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Lower your direct costs and Increase your gross profit
Decrease Cost of Labor Decrease average wage on crews Increase efficiency – bring jobs in on time Decrease Cost of Materials Increase Materials Markup Better Estimate of Materials Cost Negotiate better prices with vendors Purchase in bulk
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Working with Direct Costs
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Improving The Net Profit Margin
To improve the Net profit margin you also need to manage the following: Administrative operating processes Variable Costs Overhead Costs Customer relations Administrative Team Skills and Development Marketing Activities and Costs
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Working On Variable Costs
Profit Improvement Strategies Working On Variable Costs You can increase profit by decreasing variable or activity related expenses provided that there is no change in product or service quality that could have a consequential effect on sales volume OR You can increase profit by increasing variable or activity related expenses provided that the improvement in product or service quality allows you to win greater market share or premium price It is also extremely important to keep a keen eye on variable expenses. These should always be viewed as an investment in generating revenue rather than simply a cost. Without expenses, you have no business. However, it is very important to manage those expenses and ensure that you are always getting the best return for each of your expenses. Profit will increase if you can decrease variable expenses as long as taking out those expenses does not detract from product or service quality which might have a consequential negative effect on sales volume. Thinking laterally, profit could be increased by INCREASING variable expenses, provided that the improvement to your product or service as a result is such that it allows you to win either more sales or demand a premium price.
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Profit Improvement Strategies
Working On Fixed Costs You can increase profit by reducing fixed expenses provided that sales revenue does not decline or if it does, the reduction in revenue is less than the saving in fixed expenses. OR You can increase profit by increasing fixed expenses provided that there is a resulting increase in gross profit from greater market share or higher gross margin. With fixed expenses, profit will increase if you reduce your fixed costs without reducing your revenue, or if you increase your fixed costs but ensure you increase your sales and gross margin at a greater rate. This needs careful thought. There will come a time in many businesses when a decision needs to be made on taking on more space or more people, or investing in more plant and machinery. You need to carefully weigh up the likely outcomes of taking on those incremental fixed costs and prepare profit AND cash flow forecasts so that you understand the likely scenarios and their implications. This will help with financing decisions.
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Profit Improvement Strategies Summarized
Advisors On Target Profit Improvement Strategies Summarized Increase sales revenue by increasing price and/or volume Keep variable costs at least equal to or below the rate of increase in sales revenue Achieve greater productivity from the resources which are financed by overheads To summarize this section, you can increase profit in one or more of these ways: Increase sales revenue by increasing price and/or volume. Keep variable costs at least equal to or below the rate of increase in sales revenue. Achieve greater productivity from the resources which are financed by overheads. The key is to understand the likely outcomes of each strategy. Proper planning allows you to work through each potential scenario and reduce business and financial risk. The key is to understand the likely outcomes of each strategy. Proper planning allows you to work through each potential scenario and reduce business and financial risk.
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Profit Improvement Strategies
Advisors On Target Drilling Down Into Profit Improvement Planning: Understand The Components Of Sales Revenue TOTAL REVENUE = TC x NT x ASV TC = TOTAL CUSTOMERS = Number of customers at start - customers lost + new customers NT= NUMBER OF TRANSACTIONS = The number of times each customer deals with you ASV= AVERAGE SALE VALUE = The average value of each sale In the previous discussion of profit improvement strategies we referred to the role of price changes and the effect they can have. But remember we used the term ‘average’ customer transaction value – whereas you will probably have some regular customers who spend much more than the average and others who spend far less. The mistake many business owners make is that they simply look at the top line and monitor increases or decreases in total sales revenue. They fail to look that little bit deeper to see how sales revenue works. When you understand this you find that another set of strategies becomes available for increasing revenue. The trick is to understand the components of revenue – in other words, if you were to break down your business’ sales revenue into different elements, what would they be? In a typical business, revenue is a compound of: The number of customers you have. The numbers you lose and win in the accounting period under review. The number of times each deals with you, and How much each spends on average each time they deal with you. The equation on the slide shows how total revenue is formed on this basis.
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How To Increase Total Sales Revenue
Profit Improvement Strategies Advisors On Target How To Increase Total Sales Revenue Get more customers Improve customer retention rate Improve return visit rate Improve spend per visit AND Have customers recommend you to their friends and associates Once you understand that, you understand what you need to do to increase revenue. You need to be successful in doing one or more of the above things: 1. Get more customers. 2. Get them to stay with you longer or come back more often. 3. Get them to spend more with you each time they do business with you. 4. Ideally, have them recommend you to friends and associates. This puts the previous slides on increasing price or volume into a ‘real life’ scenario so that you can start to understand the sorts of things you would need to do to increase price or increase volume.
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Profit Improvement Strategies
Advisors On Target Summary This module has focused on profit improvement strategies…how to make more money We’ve covered the three key profit drivers: price, volume and cost You’ve seen the impact of discounting prices as compared with increasing your prices Our On Target Profit Planning Template can help you analyze where the potential for Profit Improvement lies within your business It’s all about the phrase ‘What you can measure you can manage’ This slide is a summary of what has been covered by Module 4. It transitions you into Module 5, which examines Key Performance Indicator Monitoring.
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Creating a Budget to achieve your Profit Plan
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Get to know your numbers
Shape up your Chart of Accounts and Bookkeeping Plan for success – the budgeting process (informed by your business plan) Stay informed with timely reporting Know the score with ongoing monitoring of actual to budget performance
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The Budgeting/Profit Plan Process
Review your Business Plan Use your 2012 full year and 2013 to date Monthly Profit & Loss Report as a guide Create a Profit Plan Implement Hours/Compensation assumptions to project labor cost and hours if appropriate to your business (Steve) Evaluate other changes in Expenses Ensure budgeted hours will meet revenue targets Re-evaluate all components
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Use Design Spiral Thinking
Revenue Target Marketing Plan Hours Labor Cost Profit Target Other Expenses What is revenue target? What is projected cost of direct labor? What other expenses need adjustment? Does budget achieve profit target? Do hours support revenue target? Should revenue target be adjusted? Does marketing plan support revenue target?
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Let’s look at an example…
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Monitor your Progress Incorporate Budget into QuickBooks
Monitor Monthly & Year to Date Progress Make management decisions to achieve plan Identify Action Steps for upcoming month
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Why Every Business Owner Needs to Know It
Break Even Why Every Business Owner Needs to Know It
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BEST PRACTICE GUIDE : Breakeven Sales
Overhead Expenses* Breakeven Sales = __________________________ Gross Profit Margin Calculate by week, month, or year to manage your business effectively and keep a positive bottom line *Include Variable Costs, Overhead Costs and “Other Costs” if critical to business survival
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Annual Budget Example Revenue $500,000 Direct Costs ($275,000) 55%
Gross Profit $225,000 45% Variable Expenses ($25,000) 5% Overhead Expenses ($150,000) 30% Net Operating Profit $50,000 10%
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Annual Break-Even Revenue
Variable Expenses $25,000 Overhead Expenses + $150,000 Total Overhead Expenses $175,000 Divided by GP% 45% Break-Even Revenue $388,889
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Monthly Budget Example
Revenue $48,000 Direct Costs ($26,400) 55% Gross Profit $21,600 45% Variable Expenses ($2,400) 5% Overhead Expenses ($14,400) 30% Net Operating Profit $4,800 10%
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Monthly Budget Break-Even
Variable Expenses $2,400 Overhead Expenses $14,400 Total $16,800 Divided by GP% 45% Break-Even Revenue $37,333
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What about other expenses?
Take into account other expenses that don’t hit the Profit and Loss Owner Draws/Loans to Shareholders Loan Payments Credit Card Payments not included in monthly operating expenses
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Changed Break-Even Variable Expenses $2,400 Overhead Expenses $14,400
Vehicle Loan $750 Total $17,550 Divided by GP% 45% Break-Even Revenue $39,000
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Using Break-Even Analysis to Add Infrastructure
How much more revenue do you need for new overhead to at least pay for itself?
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Adding a new overhead position
Sales Salary $40,000 Payroll Tax/WC $5,200 Benefits $3,900 Vehicle Expense $6,000 Cell Phone $600 Total $55,700 Divided by GP% 45% Break-Even $123,778
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Knowledge is power Knowing your numbers and learning how even small but timely changes affect your profitability increase your opportunities for success in any economy.
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Implementation Steps Create a budget for 2013
If you already have a budget, review and revise as needed Determine your breakeven point for your 2013 budget Annual For the month of July 2013
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