Your Profit Plan On Target Group Coaching. Your Business is an Investment to Make Money To do this,...
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Your Profit Plan
On Target Group Coaching
Your Business is an Investment to Make Money To do this, you must simultaneously
increase three things: Net Profit Cash flow Return on Investment (ROI)
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How To Calculate Profit Margins Gross Profit Margin (GP%) is profit
derived from work produced divided by Gross Revenue Gross Profit Margin = (Gross
Profit/Revenue)%
Net Profit Margin (NP%) is after-tax net profit divided by Gross Revenue Net Profit Margin = (Net Profit/Revenue)%
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Key Profit Drivers
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Work with these Key Profit Drivers to improve profitability
Focus on the areas where most potential increase in profit is possible
Price Volume of
salesVariable
costsFixed costs
Pricing Strategies You can increase profit by increasing price
as long as you don’t lose so much business that it reduces your net profit
You can increase profit by decreasing priceas long as you increase volume
enough to achieve your net profit
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How Much Additional Volume Do I Need If I Cut My Price?
Price
Decrease
Volume Increase To
Give Same GP
GROSS PROFIT MARGIN %
35 40 45 50 55
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13
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21
18
15
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8
30
25
22
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40
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25
22
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Discount Price by 10%
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What Volume Can I Afford To Lose If I Increase My Price?
Price
Increase
Volume Decrease To
Give Same GP
GROSS PROFIT MARGIN %
35 40 45 50 55
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10
9
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7
6
15
13
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10
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19
17
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19
18
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Increase Price by 8%
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Working On Volume Of Transactions
You can increase profit by increasing volume of sales
provided that price remains constant so that the increase in volume translates in higher gross profit
OR You can increase profit by decreasing
volume of sales
provided that the resultant saving in costs outweighs the reduction in gross profit arising from the decrease in volume
Cost Strategies Increase Gross Profit by reducing Direct
Costs Labor Materials
Keep Variable costs equal or below the rate of increase in sales revenue
Achieve greater productivity from resources that are financed by Overhead (Fixed) Costs
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Cost Definitions
Direct Costs: Costs directly related to the production of revenue.
Variable Costs: Costs that can vary directly with sales revenue. Generally related to production but not a direct job cost
Fixed Costs: Costs that are incurred whether or not any sales are made.
Overhead (General & Administrative) Costs: These costs are generally fixed but some may be variable as well
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Increase Gross Profit Margin
To improve the Gross profit margin you need to work on these drivers:
Pricing & Estimating Material Costs Labor Costs Production / service delivery processes Customer relationships Team Skills and Development
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Lower your direct costs and Increase your gross profit Decrease Cost of Labor
Decrease average wage on crews Increase efficiency – bring jobs in on time
Decrease Cost of Materials Increase Materials Markup Better Estimate of Materials Cost Negotiate better prices with vendors Purchase in bulk
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Working with Direct Costs
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Improving The Net Profit Margin To improve the Net profit margin you
also need to manage the following: Administrative operating processes Variable Costs Overhead Costs Customer relations Administrative Team Skills and
Development Marketing Activities and Costs
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Working On Variable Costs
You can increase profit by decreasing variable or activity related expenses
provided that there is no change in product or service quality that could have a consequential effect on sales volume
OR You can increase profit by increasing
variable or activity related expenses provided that the improvement in product or service
quality allows you to win greater market share or premium price
Working On Fixed Costs
You can increase profit by reducing fixed expenses provided that sales revenue does not decline or if it
does, the reduction in revenue is less than the saving in fixed expenses.
OR You can increase profit by increasing fixed
expenses provided that there is a resulting increase in gross
profit from greater market share or higher gross margin.
Advisors On Target
Profit Improvement Strategies Summarized
1. Increase sales revenue by increasing price and/or volume
2. Keep variable costs at least equal to or below the rate of increase in sales revenue
3. Achieve greater productivity from the resources which are financed by overheads
The key is to understand the likely outcomes of each strategy. Proper planning allows you to work through each potential scenario and reduce business and financial risk.
Advisors On Target
Drilling Down Into Profit Improvement Planning: Understand The Components Of Sales Revenue
TOTAL REVENUE = TC x NT x ASV
TC = TOTAL CUSTOMERS = Number of customers at start - customers lost + new customers
NT= NUMBER OF TRANSACTIONS = The number of times each customer deals with you
ASV= AVERAGE SALE VALUE = The average value of each sale
Advisors On Target
How To Increase Total Sales Revenue
Get more customers Improve customer retention rate Improve return visit rate Improve spend per visitAND Have customers recommend you to
their friends and associates
Advisors On Target
Summary This module has focused on profit
improvement strategies…how to make more money
We’ve covered the three key profit drivers: price, volume and cost
You’ve seen the impact of discounting prices as compared with increasing your prices
Our On Target Profit Planning Template can help you analyze where the potential for Profit Improvement lies within your business
It’s all about the phrase ‘What you can measure you can manage’
Creating a Budget to
achieve your Profit Plan
Get to know your numbers Shape up your Chart of
Accounts and Bookkeeping Plan for success – the
budgeting process (informed by your business plan)
Stay informed with timely reporting
Know the score with ongoing monitoring of actual to budget performance
The Budgeting/Profit Plan Process Review your Business Plan Use your 2012 full year and 2013 to date
Monthly Profit & Loss Report as a guide Create a Profit Plan Implement Hours/Compensation
assumptions to project labor cost and hours if appropriate to your business (Steve)
Evaluate other changes in Expenses Ensure budgeted hours will meet revenue
targets Re-evaluate all components
Use Design Spiral Thinking What is revenue target? What is projected cost of
direct labor? What other expenses need
adjustment? Does budget achieve profit
target? Do hours support revenue
target? Should revenue target be
adjusted? Does marketing plan support
revenue target?
Revenue TargetRevenue Target
Marketing PlanMarketing Plan
HoursHours
Labor CostLabor Cost
Profit TargetProfit Target
Other ExpensesOther Expenses
Let’s look at an example…
Monitor your Progress Incorporate Budget into QuickBooks Monitor Monthly & Year to Date Progress Make management decisions to achieve
plan Identify Action Steps for upcoming
month
Break Even
Why Every Business Owner Needs to Know It
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BEST PRACTICE GUIDE : Breakeven Sales
Overhead Expenses*Breakeven Sales = __________________________
Gross Profit Margin
Calculate by week, month, or year to manage your business effectively and keep a positive bottom line
*Include Variable Costs, Overhead Costs and “Other Costs” if critical to business survival
Annual Budget Example
Revenue $500,000
Direct Costs ($275,000) 55%
Gross Profit $225,000 45%
Variable Expenses ($25,000) 5%
Overhead Expenses ($150,000) 30%
Net Operating Profit $50,000 10%
Annual Break-Even RevenueVariable Expenses $25,000
Overhead Expenses + $150,000
Total Overhead Expenses $175,000
Divided by GP% 45%
Break-Even Revenue $388,889
Monthly Budget Example
Revenue $48,000
Direct Costs ($26,400) 55%
Gross Profit $21,600 45%
Variable Expenses ($2,400) 5%
Overhead Expenses ($14,400) 30%
Net Operating Profit $4,800 10%
Monthly Budget Break-Even
Variable Expenses $2,400
Overhead Expenses $14,400
Total $16,800
Divided by GP% 45%
Break-Even Revenue $37,333
What about other expenses? Take into account other expenses that
don’t hit the Profit and Loss Owner Draws/Loans to Shareholders Loan Payments Credit Card Payments not included in
monthly operating expenses
Changed Break-Even Variable Expenses $2,400
Overhead Expenses $14,400
Vehicle Loan $750
Total $17,550
Divided by GP% 45%
Break-Even Revenue $39,000
Using Break-Even Analysis to Add Infrastructure
How much more revenue do you need for new overhead to at least pay for itself?
Adding a new overhead positionSales Salary $40,000
Payroll Tax/WC $5,200
Benefits $3,900
Vehicle Expense $6,000
Cell Phone $600
Total $55,700
Divided by GP% 45%
Break-Even $123,778
Knowledge is power Knowing your numbers and learning
how even small but timely changes affect your profitability increase your opportunities for success in any economy.
Create a budget for 2013 If you already have a budget, review
and revise as needed Determine your breakeven point for
your 2013 budget Annual For the month of July 2013
Implementation Steps
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