Third Quarter: Time to Plan Your 2016 Kick Off!

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 31^st 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.

1. Schedule a date
2. Gather information
3. Project Sales
4. Project Cost of Goods Sold
5. Project Expenses
6. 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”:

1. 2015 actual monthly revenue totals
2. 2015 actual monthly cost of goods sold totals
3. 2015 actual monthly expense totals
4. List of any capital purchases you plan to make in 2016
5. List of any projects you intend to tackle in 2016
6. List of marketing and advertising activities you have done for 2015, noting what worked and what didn’t
7. List of any new products or services you plan to kick off in 2016
8. List any products or services you plan to discontinue due to low margins
9. 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!

Third Quarter: It is a Catch or a Fumble?

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 31^st?

All is not lost if your bottom line is looking weak or you are entering a slow 4^th 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 3^rd 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:

1. Total Revenue / Total Number of Working Days = Daily Revenue
2. Total Expenses / Total Number of Working Days = Daily Expenses
3. Daily revenue – Daily expenses = Daily Profit.
4. Total Expenses / Daily Revenue = Number of Working Days to Breakeven!
5. 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 1^st, 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 4^th 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!

Managing Change: Not for the Faint of Heart! part 2

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.