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Third Quarter: Time to Plan Your 2016 Kick Off! - Stanford Management Consulting

Tips and 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.

  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!