As a small business owner, you know that profitability is the key to long-term success. However, staying profitable can be a challenge, especially in today’s uncertain economic climate. That’s why it’s crucial to have a solid plan in place to ensure that your business is generating the profits it needs to thrive. Whether you’re just starting out or have been in business for a while, these tips will help you set yourself up for success when profit planning in 2023 and beyond.
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What is profit planning?
Before we dig into how to effectively profit plan, it’s important to understand what profit planning is. Profit planning is like goal-setting for your business. It’s determining what you want to or hope to achieve during the year, and then working backward to plan how to achieve those goals.
For example, one goal that a small business owner might set when profit planning could be to increase overall revenue by 10% over the course of the year by introducing new products or services, expanding into new markets, or increasing marketing efforts.
Alternatively, the business owner might set a goal to reduce expenses in order to increase profit levels. This could involve finding ways to streamline operations, negotiating better deals with suppliers, or implementing cost-saving measures such as energy-efficient equipment or telecommuting options for employees.
Why profit planning is important for your business?
There are some real benefits to a detailed profit plan. Having one can aid in important things like tax mitigation and strategic plans.
When you lay everything out and consider what’s coming, you can say, “Hey, I know I’ve got this much that I’ve got to spend over the year. How do I make that happen? Do I need to push some expenses into January? Do I need to push some in December?” It’ll allow you to build flexibility into your organization and business strategy.
How is profit planning used?
These financial goals should help to shape business plans and operations moving forward. As such, the main goal of profit planning is to understand or put in place not just what you would like to do next year, but what you would like to achieve for the next three to five years. When you set out to do this, start by asking yourself, “Where are we going as an organization?”
Basically, it’s a goal post for you to be able to measure against regularly (monthly, quarterly, etc.). You look at the plan and compare it to where you are. Then, identify the variance. Is it favorable or unfavorable? What do you need to do to achieve those goals?
The key to an effective profit plan is making it realistic. Yes, it’s good to have goals and it’s good to set the bar high and set standards high, but you also need to make those goals realistic so you can go ahead and reasonably achieve some success with what you forecast. Use SMART goals (specific, measurable, attainable, realistic, time-bound) when planning to help ensure your goals are realistic and that you can clearly measure success and/or failure.
Profit Planning Tips
A profit plan should include everything. Essentially you want to lay out everything that you possibly can think of.
Start with your current sales numbers. The planning process really starts with that because a lot of what you’ll do is based on sales. From there you can look at operational expenses.
As you continue, make sure you are asking yourself things like:
- Will I continue to have equipment payments?
- Am I going to have clients or customers that have AR (accounts receivable) that are going to take a long time to collect?
- Am I going to have pricing pressure on my margins next year?
- Will I have any kind of challenges with labor contracts?
- Do I expect raw materials costs to increase next year?
Those are all things you want to try and incorporate.
Growth is important to consider and include as well. Where do you anticipate growing this business? Is it going to be organic growth? Is it going to be acquisition related? Those are all very important considerations.
Of course, we don’t have a crystal ball. We don’t know what business conditions might be like in December of next year, but trying to capture as much as you can will really make you feel like you’ve put together a plan that will give you some success.
Seasonality is certainly a big consideration. If your revenue or expenses shift dramatically at particular points throughout the year, make sure you consider that when planning. You likely don’t want to set high profit goals for months when expenses are up or revenue is down.
You also want to consider seasonal customers and clients. If you have retained clients that purchase goods or services on a seasonal basis, include that, too.
You don’t have a crystal ball – and that’s ok.
Planning is important, but you can get caught up in it. Don’t be so consumed with getting it ‘right’ that you lose sight of the day-to-day. Don’t be so concerned with achieving the goals you’ve laid out that you can’t be flexible. You want to be able to pivot as conditions change and opportunities present themselves.
You won’t have the ability to be completely successful in your forecasting. You don’t have a crystal ball to see into the future – and that’s ok.
Build a profit plan and use it as intended – as a tool for the growth of your organization.
Effective profit planning is crucial for the success of any small business. By setting clear goals, analyzing your financial data, and constantly seeking opportunities for growth and improvement, you can ensure that your business is on track to achieve the profit goals your organization needs to thrive. We hope that the tips we’ve shared in this blog have given you some valuable insights into how to create an effective profit plan for 2023. Remember, the key is to be proactive, stay focused, and never stop looking for ways to improve and grow your business. With these strategies in mind, you’ll be well on your way to a profitable and successful year ahead.
Why Work With Margin Authority
At Margin Authority, we focus on helping business owners manage their company’s financials for faster, more profitable, and more efficient business decisions. If you’re looking for support in developing your profit plan for 2023, let us help. It’s what we do. Reach out to begin building your profit plan today.