Your Profit Plan

On Target Group Coaching

Your Business is an Investment to Make Money To do this, you must simultaneously

increase three things: Net Profit Cash flow Return on Investment (ROI)

2

How To Calculate Profit Margins 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

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Work with these Key Profit Drivers to improve profitability

Focus on the areas where most potential increase in profit is possible

Price Volume of

salesVariable

costsFixed costs

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 priceas 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?

Price

Decrease

Volume Increase To

Give Same GP

GROSS PROFIT MARGIN %

35 40 45 50 55

4

13

11

10

9

8

6

21

18

15

14

12

8

30

25

22

19

17

10

40

33

29

25

22

12

52

43

36

32

28

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Discount Price by 10%

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What Volume Can I Afford To Lose If I Increase My Price?

Price

Increase

Volume Decrease To

Give Same GP

GROSS PROFIT MARGIN %

35 40 45 50 55

4

10

9

8

7

7

6

15

13

12

11

10

8

19

17

15

14

13

10

22

20

18

17

15

12

26

23

21

19

18

8

Increase Price by 8%

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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

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

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

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

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

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.

Advisors On Target

Profit Improvement Strategies Summarized

1. Increase sales revenue by increasing price and/or volume

2. Keep variable costs at least equal to or below the rate of increase in sales revenue

3. 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.

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

Advisors On Target

How To Increase Total Sales Revenue

Get more customers Improve customer retention rate Improve return visit rate Improve spend per visitAND Have customers recommend you to

their friends and associates

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’

Creating a Budget to

achieve your Profit Plan

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

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

Use Design Spiral Thinking 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?

Revenue TargetRevenue Target

Marketing PlanMarketing Plan

HoursHours

Labor CostLabor Cost

Profit TargetProfit Target

Other ExpensesOther Expenses

Let’s look at an example…

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

Break Even

Why Every Business Owner Needs to Know It

29

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

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%

Annual Break-Even RevenueVariable Expenses $25,000

Overhead Expenses + $150,000

Total Overhead Expenses $175,000

Divided by GP% 45%

Break-Even Revenue $388,889

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%

Monthly Budget Break-Even

Variable Expenses $2,400

Overhead Expenses $14,400

Total $16,800

Divided by GP% 45%

Break-Even Revenue $37,333

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

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

Using Break-Even Analysis to Add Infrastructure

How much more revenue do you need for new overhead to at least pay for itself?

Adding a new overhead positionSales 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

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.

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

Implementation Steps

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