April 15, 2012
You’re in business to make profits, so that’s where you should start when making a plan for the coming year.
A specific profit target can be a powerful catalyst for improvement throughout your company. A minimum goal to start should be to attain the average profitability for your industry. Then you can reach higher.
Here’s how entrepreneurs can set and achieve a profit goal.
- Determine a targeted return on invested capital. To calculate this number, divide forecasted net profit by total capital (long-term debt plus shareholder equity).
- Calculate the gross profit margin you will need to achieve this profit goal. Take your projected net profit and add forecasted selling, general and administrative expenses. This will give you a forecasted gross profit margin. In coming up with your expense projection, plan to keep a tight rein on costs, but remember you might want to beef up selling and marketing spending to deliver more revenue and help achieve your goals.
- Calculate the difference between your targeted gross profit margin and last year’s actual gross margin. The gap between these two numbers is what you have to make up through a combination of higher sales, increased labour productivity and improved material utilization.
- Prepare a sales forecast by month and product line. Use the exercise as an opportunity to contact your customers to ask about their purchasing intentions. Then, estimate the sales you expect to receive from customers and the sales you will need to generate through a marketing and sales program.
- Forecast cost of goods sold. Use last year’s numbers for labour, material and overhead and then adjust to account for planned improvements.
- Meet with your management team and develop a plan. Here’s where you and your team agree on specific actions to boost sales, improve labour productivity and tighten supply and expense management. Make department heads responsible for delivering in their areas.
Make sure to take a close look at your pricing and inventory management. Are you charging customers enough? Are you working to increase sales of your highest margin items and focusing on either boosting your margin on laggards or eliminating them?
- Execute. Execute. Execute. Closely monitor your progress in implementing the items in your action plan and adjust as necessary through the year.
It’s essential to seek out and listen to the input from your employees when looking for innovative ways to improve your business and achieve goals. Make sure the employees know you want their ideas.