Your Profit Plan On Target Group Coaching

2 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)

3 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)%

4

Key Profit Drivers

 Work with these Key Profit Drivers to improve profitability  Focus on the areas where most potential increase in profit is possible  Price  Volume of sales  Variable costs  Fixed costs

5

Pricing Strategies

 You can increase profit by increasing price

much business that it reduces your net profit

 You can increase profit by decreasing price

as long as you increase volume enough to achieve your net profit

6 Price Decrease How Much Additional Volume Do I Need If I Cut My Price?

%

GROSS PROFIT MARGIN

4 35 13 40 11 45 10 50 9 55 8 6 8 10 12 21 30 40 52 18 25 33 43 15 22 29 36 14 19 25 32 12 17 22 28 Volume Increase To Give Same GP

7

Discount Price by 10%

8 Price Increase What Volume Can I Afford To Lose If I Increase My Price?

%

GROSS PROFIT MARGIN

4 35 10 40 9 45 8 50 7 55 7 6 8 10 12 15 19 22 26 13 17 20 23 12 15 18 21 11 14 17 19 10 13 Volume Decrease To Give Same GP 15 18

9

Increase Price by 8%

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  provided that the resultant saving in costs outweighs the reduction in gross profit arising from the decrease in volume

11

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

12

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

13

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

14 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

15

Working with Direct Costs

16 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

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 1.

2.

3.

Profit Improvement Strategies Summarized Increase sales revenue by increasing price and/or volume Keep variable costs at least equal to or below the rate of increase in sales revenue 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

customers customers lost

+ NT= NUMBER OF TRANSACTIONS =

The with you new

ASV= AVERAGE SALE VALUE =

The average

Advisors On Target How To Increase Total Sales Revenue     Get more customers Improve customer retention rate Improve return visit rate Improve spend per visit AND  Have customers recommend you to their friends and associates

Advisors On Target

Summary

    This module has focused on profit 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 Improvement lies within your business 

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 Target Marketing Plan Hours Labor Cost Profit Target Other 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

29 Break Even Why Every Business Owner Needs to Know It

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 Direct Costs Gross Profit Variable Expenses Overhead Expenses Net Operating Profit $500,000 ($275,000) $225,000 ($25,000) ($150,000) $50,000 55% 45% 5% 30% 10%

Annual Break-Even Revenue Variable Expenses $25,000 Overhead Expenses Total Overhead Expenses Divided by GP% Break-Even Revenue + $150,000 $175,000 45% $388,889

Monthly Budget Example

Revenue Direct Costs Gross Profit Variable Expenses Overhead Expenses Net Operating Profit $48,000 ($26,400) $21,600 ($2,400) ($14,400) $4,800 55% 45% 5% 30% 10%

Monthly Budget Break-Even

Variable Expenses $2,400 Overhead Expenses Total Divided by GP% $14,400 $16,800 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 Overhead Expenses $2,400 $14,400 Vehicle Loan Total Divided by GP% Break-Even Revenue $750 $17,550 45% $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 position

Sales Salary $40,000 Payroll Tax/WC $5,200 Benefits Vehicle Expense Cell Phone Total Divided by GP% Break-Even $3,900 $6,000 $600 $55,700 45% $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.

40

Implementation Steps

   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