{"id":1028,"date":"2018-11-21T01:00:56","date_gmt":"2018-11-21T01:00:56","guid":{"rendered":"http:\/\/rocksolidbizdevelopment.com\/ourblog\/?p=1028"},"modified":"2025-07-01T17:20:22","modified_gmt":"2025-07-01T17:20:22","slug":"dont-produce-a-budget-map-out-a-profit-plan-part-two","status":"publish","type":"post","link":"https:\/\/rocksolidbizdevelopment.com\/ourblog\/dont-produce-a-budget-map-out-a-profit-plan-part-two\/","title":{"rendered":"Don\u2019t produce a budget. Map out a Profit Plan. (Part Two)"},"content":{"rendered":"

The blog below is a repeat, as were the previous two postings (October 17, 2018 and November 7, 2018). Combined, the three postings offer a template for developing a 2019 Plan. We are re-publishing these now because developing an Annual Plan is a critically important activity for any small business to undertake, and now is the right time to do it. If you don’t remember seeing these before, perhaps they will encourage you to get serious about creating an Annual Plan. If you do remember them, then maybe they serve as a good refresher. Either way, plan well.<\/span><\/p>\n

We have been talking about an annual planning process.\u00a0 It began two postings ago when we talked about laying out three to five strategic initiatives aimed at moving the company forward.\u00a0 Then with our last posting, we began a 2-part discussion on what some call a \u201cbudget,\u201d but what we prefer to call a \u201cprofit plan.\u201d\u00a0 Part 1 dealt with the revenue side of things.\u00a0 How do we forecast what we expect to sell next year?\u00a0 Now we\u2019ll deal with the cost side of things.\u00a0 We need a spending plan that anticipates what we expect our costs to be next near.\u00a0 If you\u2019re interested in our discussion about projecting costs, please continue reading Profit Plan (Part Two) below.<\/p>\n

\u00a0<\/strong>Don\u2019t produce a budget.\u00a0 Map out a Profit Plan. (Part Two)<\/strong><\/p>\n

The basic problem we see with forecasting the cost side of the business is people trying to take shortcuts in the name of being expedient.\u00a0 Most shortcuts create two problems:<\/p>\n

    \n
  1. They can rob you of the level of detail you need to spot waste, inefficiency, or irregularities.<\/li>\n
  2. If your Plan starts to falter, they can make it difficult to analyze what\u2019s going wrong, and even more difficult to figure out how to fix it.<\/li>\n<\/ol>\n

    Here are a few examples of shortcuts you should not<\/u><\/em> take.<\/p>\n

    Bad shortcut #1<\/strong><\/p>\n

    Breaking down all our sales and expense projections by month is a real pain.\u00a0 Can\u2019t we make do with just the annual numbers?<\/p>\n

    Nope.\u00a0 You\u2019ll want to break down everything by month so that when your actual financial statements are available each month, you\u2019ll be able to compare them to your Profit Plan.\u00a0 If your Plan is made up of only annual numbers, you may not realize it\u2019s off target until it\u2019s too late in the year the do much about it.<\/p>\n

    Bad shortcut #2<\/strong><\/p>\n

    We know what our overall Cost of Goods is as a percentage of sales.\u00a0 Can\u2019t we just use that instead of calculating a separate Cost of Goods for each of our products or service lines?<\/p>\n

    If you\u2019ve got multiple products or service lines, each with its own unique Cost of Goods structure, you\u2019ll need to know how much of each you expect to sell, and then do a separate Cost of Goods calculation on each.\u00a0 Otherwise, if your Cost of Goods starts going out of whack, how will you know which of your products or service lines is the culprit?<\/p>\n

    Bad shortcut #3<\/strong><\/p>\n

    Do we really have to analyze our fixed costs.\u00a0 After all, they are \u201cfixed,\u201d right?\u00a0 Can\u2019t we just use last year\u2019s costs as a percent of sales and go with that?<\/p>\n

    No, we can\u2019t.\u00a0 Our fixed costs (usually referred to as SG&A or Overhead) are \u201cfixed\u201d only in the sense that we have to pay them no matter what.\u00a0 Even if we\u2019re having a dismal sales month, we still have to pay salaries, utilities, bank debt, etc.\u00a0 But these so-called \u201cfixed\u201d costs do change.\u00a0 We may hire new office people or grant salary increases to existing employees, the lease agreement for our office space may have a rent escalation clause, some of our vendors might put through price increases, etc.\u00a0 Besides, if we just base our spending on historical trends, we eliminate opportunities to improve . . . to eliminate waste and improve efficiency.<\/p>\n

    Throughout this process, for both revenue and expenses, you should be recording assumptions for each line item, i.e. \u201cWe plan to put in an across-the-board 5% price increase in April,\u201d or \u201cWe expect our energy costs to be flat.\u201d\u00a0 During the year, as you compare your actual results to the results you expected in your Profit Plan, you\u2019ll be looking for variances or deviations.\u00a0 When you find them, if they are significant, you\u2019ll ask yourself, \u201cWhat the heck were we thinking when we forecast that number?\u201d\u00a0 If you recorded your assumptions properly, they will remind you what you were thinking.\u00a0 If the assumption is flawed in some way, then you may have to make a correction to your Profit Plan.\u00a0 But if the assumption still seems valid, then we apparently failed to execute on that particular item and we\u2019ll need to find out if there\u2019s some corrective action we can take to get back on track.<\/p>\n

    Now for the tough part.\u00a0 You\u2019ve projected your sales and expenses for next year, so now you can see your projected profit.\u00a0 If that number meets your expectations, then good, we\u2019re done.\u00a0 But if not, you have a choice to make: you can either accept the profit level the Plan projects (even though it\u2019s lower than what you expected); or you can go back to the Plan, tweeking it here and there to produce the profit result you want.\u00a0 The danger here is that your sound business judgement gets replaced by hope and unreasonable optimism, and the tweeks you make are nothing more than wishful thinking.\u00a0 Obviously, you want to avoid that.<\/p>\n

    In summary of this posting and the previous two postings:<\/p>\n