It is critical to build a profit plan to help a business stay on track. It provides a financial roadmap for your company. But with many competing demands, it can be difficult to know where to start. Seasonal cash-flow changes can be unpredictable. As are market demand and competitive factors.
The best way to start is by understanding your business goals. Involve all key stakeholders to align the plan with your goals. Decide what key metrics you will track and what tools you will use to track them. Make sure there is one source of truth for data and that everyone agrees on the validity of the numbers. Then through analytical tools, track and measure progress against your goals.
Uses of a Profit Plan
A formal profit plan prepares a company for possible challenges and ensures maximum profit. CPAsNet noted that profit plans are useful to:
- Help owners achievetheir financial goals;
- Improve andmeasure performance;
- Establish aframework for making decisions; and
- Educate and motivate keyemployees
Build a Profit Plan for your Business
Profit doesn’t happen by itself. Look over your processes and envision how you want it all to unfold. Here are some suggested steps to consider when making your plan:
- Set a Profit Goal. Set clear targets and make a plan for how you should get there. A target profit gives your business a set of goals to work throughout the year. Consider the number of units sold with its fixed and variable cost. When it comes to expected profit, slightly underestimate rather than overestimate.
- Create a Budget. Make a detailed budget plan. Have a look at financing options for your business. Set a potential plan B in case “things” happen. Estimate just how much you perceive your business is going to spend in a certain amount of time.
- List Expenses. Be sure to write down every single expense the business makes during its operations. It lets you know where you are spending too much. Use costing sheets to track all cost associated with each product. In this way, you can calculate the gross profit.
- Calculate the Profit Margin. A margin is what keeps you in business. It is equal to the gross profit divided by the revenue and multiplied by 100. It will vary per industry, but according to The Corporate Finance Institute, a 10% net profit margin is considered average.
- Keep the Costs Down. Entrepreneurs don’t need to spend a lot of money. Find smart ways to start with less money. Set a margin that covers your costs including overhead. Make a realistic budget to help you achieve your goals.
The best way to start profit planning is to understand your business goals. Then make a detailed budget plan based on those goals. List down the income and expenses and keep your costs down as much as possible. The higher the profit margin, the more it can sustain your business and put you on the road to success.