Business Strategy
“Julia, What should I do to plan for an increase in sales for 2016?”
The budget is done, now what? One of the most important pieces of your plan for the New Year is to develop a strategic approach to achieving your forecast of sales while controlling all the cost of running the business. Sounds easy, right? For most small business owners, this is one of the biggest challenges. I cannot tell you how many times we hear “If we could just get more sales”! The truth is, without all the tools we have discussed this year in controlling cost and planning for profit, an increase in sales just means working harder with no increase in profit. You want to project an increase in sales using a strategic approach so you are spending resources effectively. Those resources are time, people, and money.
Remember before any strategy can be applied to your business you first must identify where you are and where you want to go. The strategic approach is simply how you are going to get there. Sound familiar? We use this same approach to strategically planning for an increase in sales. The top two challenges we find in businesses are 1) the sales forecast is unreasonable and 2) the sales forecast is simply a percent increase from the previous year’s sales.
SWOT Analysis
SWOT Analysis is a time-tested tool that allows you to focus your efforts around the Strengths, Weaknesses, Opportunities, and Threats facing your business. The Strengths and Weaknesses are internal while the Opportunity and Threats are external to the business.
A SWOT Analysis can be used for any planning exercise. It is simply how you plan to achieve the goals you have set. Use this approach to plan your sales strategy by defining activities that support sales goals. Identifying the SWOT in your business will help you accentuate the positive and overcome the negative activities that drive sales. This is a tough one for small businesses because many owners do not have a sales background.
SWOT- Strengths, Weaknesses, Opportunities, and Threats
Strengths: Think about the attributes of your business that will help you achieve your objective, increase in sales. Questions to consider:
- What do you do well?
- What products/ services are you known for?
- Are those products/ services profitable?
- Where are you most profitable in your business?
- What are your competitive strengths?
- What products/services are you ready to take to market that will increase your competitive strength?
- What do you do better than your competitors?
Weaknesses: Think about the attributes of your business that could hurt your progress in achieving your objective, increase in sales. Questions to consider:
- In what areas do you need to improve?
- What resources do you lack to improve these areas?
- What products/ services of your business are not very profitable?
- What would prevent you from taking new products/services to market?
- What costs you time and/or money?
- What are your competitive weaknesses?
- What do your competitors do better than you?
Opportunities: Think about the external conditions that will help you achieve your objective, increase in sales. Questions to consider:
- What are the sales goals you are currently working towards?
- How can you do more for your existing customers or clients?
- How can you use technology to enhance your sales process?
- Are there new target audiences you have the potential to reach?
- Are there related products and services that provide an opportunity for your business?
Threats: Think about the external conditions that could damage your business’s performance or prevent you from achieving your objective, increase in sales. Questions to consider:
- What obstacles do you face?
- What are the strengths of your biggest competitors?
- What are your competitors doing that you’re not?
- What’s going on in the economy?
- What’s going on in the industry?
- How can you adjust to respond to what is going on in the economy or the industry?
It isn’t enough to just “record a number” in the sales forecast and hope that you will meet those goals next year. You must look at the activities for each sales strategy used for the products/services that you offer. Using a one size fits all approach for a sales strategy doesn’t work. Define activities from each area that will enhance or improve your sales goals. Don’t over complicate this. Use the KISS design principle; keep it simple, stupid. When we fail to meet sales goals, we must adjust COGS and expenses to protect profit.
Consider the following when establishing sales and activities and strategies:
- Resources available- time, people, and money
- What changes do you need in the resources you have?
- Are you staffed appropiately?
- Does your maketing budget support what you are trying to accomplish?
- Have you identified your sales KPI’s and the frequency and methog for tracking?
- Have you established criteria to use when deciding when to abort a sales strategy?
- Make sales a priority for everyone! Each person on staff has a role in sales; from the close of the sale to the delivery of the product/service.
Planning for next year should be an exciting exercise! Look at what you have done well this year and capitalize on it. Take a close look at what you did not do well and ask yourself what changes need to happen in order to turn any negatives into positives. This can be a fun and motivating process if you don’t try to do it all in one sitting! Be realistic in sales goals – but challenge yourself and your staff. You will be amazed how much more focused you will be in 2016 with a solid plan.
Happy Planning and Happy Thanksgiving!
Check out our Back to Basics Boot Camp
Tips & Tools
“Julia, what do I need to do to plan for profit in 2016?”
So here we are – the last week in October! Has it been a good year? Have you met the goals you set for 2015? What did you do well? What could you do better? These are the questions you need to start asking yourself in order to prepare for 2016.
We have talked about business planning versus a business plan before so this post will focus on what you need to do between now and December 31st so you will be ready for kickoff on January 1st. It will be here faster than you know – Ready or not!
My advice to clients is to complete planning for the New Year by Thanksgiving. This will allow you to enjoy the holidays and know exactly what you want to accomplish in the New Year before the end of the current year. Yes, I am about to tell you to plan your planning!
The whole process can be broken into 6 steps.
- Schedule a date
- Gather information
- Project Sales
- Project Cost of Goods Sold
- Project Expenses
- Set KPI’s and monitoring frequency
I don’t recommend trying to complete a plan in one sitting! You need time to walk away and think or brainstorm. Think of things you want to accomplish next year, products and/or services you would like to add, how you can streamline areas of the business, what goals for growth you can set, or even when you plan to take a vacation.
Step One- Get Started
The first step to putting your 2016 plan together is to make a date with yourself to gather the information that you will need. It’s that easy! So, stop reading and go mark some time on your calendar for next week. You probably need about an hour just to gather information. That is it for the first step…that wasn’t hard was it?
Step Two- Gather Information
Gather the following and put it in a folder called “Planning for 2016”:
- 2015 actual monthly revenue totals
- 2015 actual monthly cost of goods sold totals
- 2015 actual monthly expense totals
- List of any capital purchases you plan to make in 2016
- List of any projects you intend to tackle in 2016
- List of marketing and advertising activities you have done for 2015, noting what worked and what didn’t
- List of any new products or services you plan to kick off in 2016
- List any products or services you plan to discontinue due to low margins
- Set dates on your calendar for steps three – six. You should break these up into several days. That is planning your plan!
Step Three- Project Sales
The best place to start projecting sales for 2016 is to review what sales were in 2015. Look at each month taking into account any unusual positive or negative spikes in sales. What were the reasons for the spikes? Were they controllable? Define what a reasonable increase in sales would be. Record these projections by month in a spreadsheet. Use excel if your financial software does not allow you to budget different amounts each month.
Things to consider when making these projections:
- How many profit centers do you have (categories you receive revenue from)?
- Are there any new products and/or services you plan to offer?
- What profit center will they be assigned to?
- How many and at what cost will you sell each?
- Projection totals overall should be based on how many of each product or service you offer, how many you will sell, and what you charge per sale. You may have multiple products / services assigned to one profit center.
- Identify any products or services that should be discontinued or any changes that should be made to increase sales.
- How will maketing and advertising activites you plan effect sales?
Step Four- COGS (Cost of Goods Sold)
The COGS should be based on a percentage of sales for control and planning purposes. For any profit center that has a COGS account attached to it you can use the percentage of sales for 2015 as a guide. Remember, to get this percentage you divide the total cost by the total revenue for that specific product or services. For example; Total food purchase is divided by the total food sales to give you the percentage of cost of goods sold. So, if total food sales were $100,000 and you spent $33,000 on food purchases, your COGS would be .33 or 33%. Do this for each COGS account. Now you can use this percentage to forecast 2016. For example; If you project sales to increase to 150,000 and you forecast a 33% GOGS, you would budget $49,500 in food purchases.
Things to consider when making these projections:
- Do you have appropiate COGS acccounts set up?
- Did 2015 reveal the percentage of sales that met your goals for the year?
- What changes do you need to make in purchasing?
- Are there changes you need to make in pricing to cover cost?
- Do the total COGS leave room for profit and expense requirements?
- Are there any capital purchases or planned actions that will reduce COGS?
Step Five-Expenses
Now this step should be a breeze. Remember the difference between fixed and variable expenses. Items like rent are fixed. You may have an increase in rent per your signed lease but the month to month amount should be the same. Fixed expenses do not change with sales volume. In most businesses, the bulk of the expenses are fixed. Variable costs are those that can fluctuate depending on the amount of sales per month. Examples of variable costs are administration staff wages, commissions, or credit card fees. The more widgets you make/sell, the higher the variable cost can be. Use the same approach as above for line item variable expenses.
Step Six- KPI’s (Key Performance Indicators)
One of the most important steps in completing the financial portion of your plan is identifying what your KPI’s are, how you will monitor them, and the frequency of measurement. You can’t manage what you can’t measure!
Labor costs are the number one challenge for most companies and a great KPI. Monitoring labor cost month to month will assist you in meeting the year end goal. Let’s say your budget is a 43% labor cost. If you are face to face with a 51% labor cost one month you can monitor this expense closely the following month(s) to bring your year to date cost back in line. A labor KPI may also alert you to other things that may be going on like uncontrolled overtime, inaccurate time keeping rerecords, and even theft. Things may happen from time to time to drive labor cost up; however, monitoring labor cost as a KPI on a monthly basis will keep you in a healthy financial position.
The financial portion of business planning is what seems to be the most challenging for folks, especially the first year. Once you have projected a budget, tracked actuals, and recorded variances for a complete year, you will find this step the most rewarding. This is why I suggest you start with the forecasted budget, which is simply a projection of total sales, cost of goods, and expenses per month for the year. This is our tool to manage by the numbers……numbers are a powerful measurement of success!
Next time we will review strategic planning to support your forecasted budget. I will focus on a strategic approach to increasing revenue and how planning can be the best tool for increasing sales!
Tips & Tools
“Julia, I have been working hard all year, however, the bottom line is not where I want it to be!”
So here we are – mid October! By now you should have closed your third quarter. Are you where you want to be? Is your focus on having your “touchdown” by December 31st?
All is not lost if your bottom line is looking weak or you are entering a slow 4th quarter. Many small and medium sized companies have not reached their breakeven point yet and will not until mid-November or early December. Keep in mind that once you have reached your breakeven point – daily revenue turns into 100% profit because all expenses for the year have been met by total revenue! So, “IT AIN’T OVER TILL IT’S OVER” and it is not over yet!!
This is the time of year when business owners have to focus on controlling expenses by paying close attention to the financial reports. Brush the dust off the planning documents you did earlier in the year and see if you have done what you said you would do. If you are falling short, get to it! Keep your staff motivated and involved in reaching the goals you set early on. Sound hard? Just remember you have been waiting all year to get to this place. If you have been managing by the numbers there should be no surprises closing the 3rd quarter.
Don’t Throw in the Towel Yet!
All businesses have peak and slow periods. When you master the idea of managing by the numbers you will see the slow periods become less stressful and allow you to continue to focus on your overall profit goals.
If you are approaching a peak business period, make sure you are continuing to monitor all costs. But, if you are approaching a slow business period, make sure you are still continuing to monitor all costs. Notice a trend to my rants! It is all about controlling costs from beginning to end!
What is Breakeven?
Breakeven analysis is used to determine when your business will be able to cover all its expenses and begin to make a profit.The lowest point of profit that a company can achieve and survive is the breakeven point. A company will breakeven when the total sales equal the total expenses. A breakeven calculation is critical for any business owner to understand. It is an activity you can do every month when reviewing your financial reports.
Breakeven is a point in time when revenues and expenses meet. Revenue earned after that point in time becomes pure profit.
Determining the Breakeven Point
To determine the breakeven point you will need total revenue and total expenses for the year from either your forecast or your P&L, and the total number of working days.
Calculating the number of working days:
To calculate your working days, take a 12 month calendar. Mark off any days of the year that you will not be open and then count what is left. The days left are your working days.
Calculating the Breakeven Day:
- Total Revenue / Total Number of Working Days = Daily Revenue
- Total Expenses / Total Number of Working Days = Daily Expenses
- Daily revenue – Daily expenses = Daily Profit.
- Total Expenses / Daily Revenue = Number of Working Days to Breakeven!
- Starting with January 1, count the number of working days to find the actual day of the year you break even.
What does this mean for profit?
Let’s assume every day up to the breakeven point that the company makes a daily profit. Beginning the day after the breakeven point the daily revenue goes directly to profit. This is because your breakeven means you have paid all of your expenses for the entire year. Yes, daily revenue becomes profit because all expenses have been met!
It all comes down to this – The closer you can get the breakeven point to be near Jan 1st, the more profit you will make!
Breakeven-A Motivator!
One of the most exciting activities we do in Beyond the Basics Boot Camp is calculating breakeven points. Just knowing the day the revenue and expense axis cross each other is extremely exciting and motivating to most business owners. We are all in business to make a profit, right? Knowing what day your hard work is approaching that touchdown is one of the best motivators! What is your motivation for 4th quarter? Is it to make it to that breakeven day or are you close and ready to focus on shaving a few days to breakeven on an earlier date? Either way – it is motivation to keep your eye on the ball!
Business Strategy
“Julia, I am overwhelmed with the number of advertisers and marketing sales people who all offer great deals to help me attract more customers. How do I know who to “believe” or know what will work?”
If you have met me at least once you have heard me say “I don’t do law and I don’t do taxes!” I don’t do marketing either! In fact, I have been known to say that marketing is a necessary evil, which doesn’t make my marketing friends happy! The point is, without marketing, how do customers know who you are and what products and services you offer? You can be really good, even great, at what you do but if no one knows about you it is pointless to call yourself a business because you are simply supporting your hobby!
Many of our clients are overwhelmed with phone calls and emails on how to gain new customers by signing up for countless marketing opportunities. So, how do you decide what to do and how much to spend on marketing activities or campaigns? The best approach is to budget appropriately and understand what the return on your investment (ROI) will be. We cannot predict the future but there is a way to measure a return on investment for marketing activities used to obtain future customers!
What is Marketing?
Marketing is the wide range of activities involved in making sure that you’re continuing to meet the needs of your customers and getting value in return. Marketing is usually focused on one product or service. A marketing plan for one product might be very different than that for another product. Marketing activities include “inbound marketing,” such as market research to find out what your target groups of potential customers are, what their needs are, which of those needs you can meet, how or where you should meet them, etc. Inbound marketing also includes analyzing the competition, finding your market niche, and pricing your products and services. “Outbound marketing” includes promoting a product through continued advertising, promotions, public relations and sales.
Before discussing the return on marketing investments, let’s review other popular words that confuse most non-marketing folks! The most frequent words I hear clients interchange are:
- Advertising – bringing a product (or service) to the attention of potential and current customers. Typically done with signs, brochures, commercials, direct mailings or e-mail messages, personal contact, etc. Find out who your target is and advertise where they hang out!
- Promotion – keeps the product in the minds of the customer and helps stimulate demand for the product. Involves ongoing advertising and publicity.
- Public Relations – include ongoing activities to ensure the overall company has a strong public image.
- Publicity – mention in the media. Organizations usually have little control over the message in the media, at least, not as they do in advertising. Good publicity is free advertising!
- Sales – cultivating prospective buyers (or leads) in a market segment; conveying the features, advantages and benefits of a product or service to the lead; and closing the sale (coming to agreement on pricing and services).
A few years ago I found a quote in “Promoting Issues and Ideas” by M. Booth and Associates, Inc. that says it perfectly:
“… if the circus is coming to town and you paint a sign saying ‘Circus Coming to the Fairground Saturday’, that’s advertising. If you put the sign on the back of an elephant and walk it into town, that’s promotion. If the elephant walks through the mayor’s flower bed, that’s publicity. And if you get the mayor to laugh about it, that’s public relations.” If the town’s citizens go the circus, you show them the many entertainment booths, explain how much fun they’ll have spending money at the booths, answer their questions and ultimately, they spend a lot at the circus, that’s sales.
Understanding the difference in the above activities is just part of the equation. The ultimate challenge is to choose how to spend your marketing dollars! Learn to know what is working and what is not!
What is a Return on Investment?
Return on investment (ROI) is a measure of the profit earned from each investment. Like the “return” you earn on your portfolio or bank account, it’s calculated as a percentage. The calculation is:
(Return – Investment)
Investment
It’s typically expressed as a percentage, so multiple your results by 100.
In simple terms, marketing ROI is implementing a system of measurement to help determine or confirm that you are getting at least $1.01 back in sales for every $1.00 you spend on marketing the product or service. Marketing ROI can be applied to either an individual marketing tool like email marketing or to a campaign itself.
Applying the ROI formula to marketing:
ROI calculations for marketing campaigns can be tricky but once you master it you will begin to approach this expense category differently and more confidently. You may have many variables on both the profit side and the investment (cost) side. But understanding the formula is essential to produce the best possible results with your marketing investments.
The components for calculating marketing ROI can be different for each organization, but with solid ROI calculations, you can focus on campaigns that deliver the greatest return. For example, if one campaign generates a 15% ROI and the other 50%, where will you invest your marketing budget next time? If your marketing budget only returns 6% and the stock market returns 12%, your company can earn more profit by investing in the stock market.
Basic Marketing ROI Formulas: Which one will you use?
One basic formula uses the gross profit for units sold in the campaign and the marketing investment for the campaign:
Gross Profit – Marketing Investment
Marketing Investment
However, some companies deduct other expenses and use a formula like this:
Profit – Marketing Investment – *Overhead Allocation – *Incremental Expenses
Marketing Investment
*These expenses are typically tracked in “Sales and General Expenses” in overhead, but some companies deduct them in ROI calculations to provide a closer estimate of the true profit their marketing campaigns are generating.
Why you want to use ROI on marketing campaigns
ROI helps you justify marketing investments. In tough times, companies often slash their marketing budgets – a dangerous move since marketing is an investment to produce revenue. By focusing on ROI, you can help your company move away from the idea that marketing is a fluffy expense that can be cut when times get tough.
| Best Approach |
Minimum Effort |
Common Approach
|
| You measure and track the ROI of all of your marketing investments. Your campaigns deliver the highest possible return and you’re able to improve them over time. You understand the choices you make because there’s solid data to support your investments. |
You calculate ROI on some investments, but because it can get complex, you don’t attempt to measure it at all times. You have a general idea of how your investments perform relative to each other, but you can’t pinpoint the exact return you’re generating. And in tough times, your budget is cut. |
You don’t measure the performance of any of your investments. In fact, marketing is viewed as a cost, not an investment at all. Your company isn’t sure what works and what does not and it’s a struggle to meet goals. |
Where to start
It’s a good idea to measure ROI on all of your marketing investments – after all, you’re in business to earn a profit. If your sales process is long and complex, you may choose to modify or simplify your ROI calculations, but a simple calculation is more useful than none at all.
1. Confirm your financial formulas
There are several figures you’ll need for your ROI calculations:
- Cost of goods sold (COGS): The cost to physically produce a product or service.
- Marketing investment: Typically you’d include just the cost of the media, not production costs or time invested by certain employees; however, in certain cases it may be better to include all of those figures.
- Revenue: It can be tricky to tie revenue to a particular campaign, especially when you run a variety of campaigns and have a long sales process. This is why it is important to outline before you start a campaign and know how you will track results.
2. Establish an ROI threshold
Set an ROI goal for your entire budget and individual campaigns; set a base as well. By doing so, you gain more power over your budget. If you project that a campaign won’t hit the threshold, don’t run it; if you can’t get an ongoing campaign over the threshold, cut it and put your money elsewhere.
3. Set your marketing budget
When you have an ROI goal and annual revenue/profit goals, you can calculate the amount of money you should spend on marketing – just solve the ROI formula for the “investment” figure. You’ll be more confident that you’re spending the right amount of money to meet your goals.
4. Calculate ROI on campaigns; track and improve your results
Tracking ROI can get difficult with complex marketing campaigns, but with a commitment and good reporting processes, you can build solid measurements, even if you have to use some estimates in the process.
Use your ROI calculations to continually improve your campaigns; test new ways to raise your ROI and spend your money on the campaigns that produce the greatest return for your company.
You must have a way to measure a return on investment for marketing activities. Remember, you can’t manage what you can’t measure! Track, track, track results!
Tip- Determine what your marketing budget should be each year. The general rule of thumb for calculating your company’s ideal marketing budget is below:
*Total Revenue x 5% = budget required to maintain current awareness/visibility
*Total Revenue x 10% = budget required to grow and gain market share
*Average and varies per industry
Tips & Tools
“Julia, I am working as hard as I can to make changes in my business. Why do I feel like I take two steps forward only to take one step back?”
You can read part 1 here.
Resistance to Change & Why Change Doesn’t Work
There are several reasons why implementing a change doesn’t work.
- It’s the wrong idea.
- It’s the right idea but the wrong time
- The reasons for the change are wrong
- There is a lack of authenticity
- It’s unrealistic
- Bad luck!
- Poor leadership
- Personal ambition gets in the way
- People are not ready for the change
- People get carried away
- Conflict resolution takes too much energy.
There are multiple reasons why a making a change may not work. The reasons may appear in isolation but usually they are acting in combinations! Having information on the reasons for change is not sufficient, there is a need to understand why they occur. Get to the why!
Reasons for Resistance
People resist change because it is usually seen as
- Disruptive
- Unwelcome
- Intrusive
- Increasing workload
Other reasons why resistance can arise include:
- Lack of trust
- Misunderstanding of the purpose
- Peer pressure
- Differing assessments of the situation
- Previous bad experiences
- Disinterest
- Change weariness
- Fear
- Ego
Why Do Change Programs Fail?
Not all changes are successful – this is true both in life and in business. In several cases it may be due to a lack of skills:
- Analytical Skills
- People Skills
- System Skills
- Business Skills
Let’s take a closer look at these:
Lack of Analytical Skills
In change or change management – guessing won’t do. The ability to analyze operations and finance is important.
Analysis can lead to solution engineering, which is vital in a change process.
Lack of People Skills
In today’s high paced business environment it is essential that you possess clear and precise people skills. These include:
- Communication skills
- Empathy
- Emotional intelligence
- Facilitation
- Appreciation
Lack of Systems Skills
This will damage the change process because lack of system skills prevent:
- Understanding how the systems involved in or impacted by the change actually operate.
- Ability to design new and improved systems and to critically evaluate them.
- Linking the systems skills with analytical skills to develop reasoned opportunities.
Lack of Business Skills
This will damage the change process because of a lack of:
- Basic understanding of how the business actually works.
- Knowledge of the various interdependencies among the business functions.
- Ability to communicate effectively in the main business functions
Change Failure
Here are some fundamental mistakes to avoid when leading and implementing a change process.
- No powerful guiding group
- No vision
- No communication of the vision
- No short term wins
- Victory declared too soon
- No deep rooted change in the culture
- Complacency
Most of these can be avoided or have their influence reduced if care is taken to acknowledge them and deal with them at the start of the change process and if vigilance is maintained for them throughout the change process.
Are You Ready for Change?
From what we have discussed, is your company ready for change? It had better be since:
- Change is a fact of life
- Change is required for long-term success.
- Change is not optional
Change is the only constant in business, and the following factors must be recognized:
- Change may be caused by internal or external factors
- Resistance to change is a normal reaction
- Change cannot always be planned
- When change can be planned, use all available information when planning.
- Communication and involvement are key elements.
- Change requires a strong change leader
- Recognize and overcome the known obstacles to change
- Use change as a positive driver for the business.
Without taking heed of the negatives and planning for the positives to be implemented, change will be seen as a resource draining activity that is unwelcome in the organization. The ability to plan, implement and manage change successfully provides a business with a significant competitive advantage in today’s business environment.
