Planning For Success

The business plan is critical to the new business and still important to the growing business. Yet, it is a tool that is often ignored by businesses already established. However, it is an important key to survival and growth as the plan provides the blueprint to financial viability and stability by planning, evaluating and controlling the business. Like a road map, the plan will provide your business strategy as well; where you want to go and how you are going to get there. Have a professional assist in the drafting of the projected financial results and in establishing a budget you can life with.

Profit Planning

Begin your profit plan by focusing on a profit goal for the budget period. One way of arriving at such a goal is to consider what you would/could earn if you instead worked for someone else and what rate of interest you would consider acceptable if you were to invest your equity elsewhere. Establishing your profit target is critical to the planning process.

A profit plan is summarized in the form of a projected income statement. Having a projected income statement at the ready to compare to actual results will mean that you can:

• Evaluate operations by comparing projected sales and costs against actual results to detect areas of unsatisfactory performance.
• Determine the need for additional resources-both in terms of capital and human resources. With a profit plan, the search for such resources can begin as early as possible to avoid future crisis points.
• Plan purchasing requirements and optimum stock levels

Sales Forecasting

Profit planning will start with sales forecasting. Estimated sales maybe more easily determined if the concentration is on unit sales or clients served instead of dollar sales. A realistic sales forecast will be based on a careful analysis of the organization’s market potential, the ability of the organization to capitalize on the market and an analysis of the organization’s current performance level. Categorize sales by product, market, department or perhaps by salesperson. Both internal and external factors that influence sales must be considered. Internal factors would include marketing and promotional plans, capacity restrictions, market expansion plans, sales force changes, pricing etc. External factors would include business trends, inflations, demographics, unemployment rates, competition etc.

Profit Margins

The next step in establishing a profit plan is projecting the gross profit margin. The Gross profit margin is typically a good indicator of both your pricing policies and the buying economies of your organization. Gross profit margins can be compared relatively easily with the forecast, the industry and actual amounts from prior periods.

Operating Expenses

Similar to the forecasting of sales and gross profit margins, the forecasting of operating expenses should begin with a review of current year performance, prior year performance and industry average information to determine the objectives for the forecast period. Using a percentage based comparison maybe very helpful when determining these objectives. External factors that can affect operating expense budgets would include inflation, changing tax rates and wage and salary awards. Internal factors to be considered would include policy changes, commitments for new leases or services, planned salary and benefit increases. Some of the operating expenses will be fixed in that they will not vary as the volume of your revenue changes. Fixed costs remain constant at any range of sales within the existing capacity of the business. Insurance, salaries, rent and amortization are examples of fixed costs. Variable costs change as the volume of sales change. Variable costs are items like cost of goods sold, sales commissions and promotional expenses.

Analyzing Costs and the Break Even Point

The breakeven point refers to the point at which you neither make a profit nor sustain a loss, At this point; your income is just enough to cover costs. To determine the breakeven point, first the contribution margin needs to be considered. The contribution margin is the difference between the selling price and the unit variable cost. This ‘difference’ in effect is available to make a ‘contribution’ towards paying the fixed costs and eventually to make a profit. In practice, most businesses have many products and the contribution margin of each of the products can and should be determined to see which products contribute and which products do not contribute.

At the point where the sales (S) equal the fixed costs (F) and the variable costs, there is a breakeven:

Example:
With a 25% contribution margin and fixed costs of $200,000, the breakeven point would be $800,000 (200,000/. 25=800,000)

If on the other hand, you wish to know the level of sales required to make a profit of $P

Example:
With a 25% contribution margin and fixed costs of $200,000 you wish to make a profit of $75,000, the sales level required would be $1,100,000((200,000+75,000)/. 25)

Forecasting the Balance Sheet

The profit plan will help you forecast sales, expenses and net income which in turn, will help you to know the financial position of the business in the future. It cannot be assumed that a cash shortage will not exist even if your business is highly profitable. Profits are not the same thing as cash in the bank. As sales grow, inventories and accounts receivable and fixed assets also grow. How will you know if your business has sufficient financial strength to meet the requirements of the growing business? To develop a forecasted balance sheet the current balance sheet is used as the starting point and the profit plan for the coming year is considered. However, it is important to consider other planned activities during the year such as acquisition of fixed assets, debt repayments, additional inventory requirements, new share issues etc. The various asset balances which are required to support the expected volume of sales for the coming year can be estimated for the forecasted balance sheet. The liabilities and owner’s equity sections can be planned and estimated for the same purpose. The forecast of cash is best estimated by developing a cash flow projection.

Cash flow forecasting

An accurate cash flow forecast is a business owner’s best ally in ensuring continued financial solvency. Cash is the lifeblood of an organization. Managing cash is as important as controlling expenses and generating revenues. Unless you can understand and plan for the timing of the actual cash that flows in and out it, is impossible to make effective decisions about spending, borrowing or expanding the business. Indeed, an effective cash flow forecast will clearly show the bank what and when additional working capital for your business maybe needed. This is key to establishing a good relationship with your bank.

Cash flow is most often monitored on a monthly basis. Start with the cash on hand at the beginning of the period. Add projected receipts expected during the month from customers or other sources. Subtract all projected disbursements by taking into consideration expenses, both operating and fixed and the credit terms established with suppliers. To prepare an accurate cash flow you need to consider some of the following:

• The ratio of cash to credit sales
• The normal terms/paying habits of customers
• The normal terms with suppliers-how promptly must vendors be paid?
• The timing of inventory purchases required to make the sales as projected
• Planned capital asset purchases

Cash flow planning is a vital and dynamic exercise in any successful business and managing the business successfully has a lot to do with managing the cash flow effectively. Completing a cash flow forecast is best done using a spreadsheet. An example of a typical cash flow follows.

Cash Disbursement Forecast for 12 months

Cash Flow Forecast for 12 months