The primary reason for running your own business is to make a profit, however this requires strategy and planning to achieve a targeted return for your efforts. You need to understand the factors of your success, and the challenges your business will face, to ensure your profits remain healthy.
Every year, you need to review your Profit and Loss Statement. This review is the basis of your profit plan. What you need to consider:
Sales and prices
How have sales performed? What are your expectations for the year ahead? Is your price too high, which can stifle sales, or is too low and pressuring your margin? What will be the effect of dropping price? Can you increase your price to increase profits?
Getting clear on price means you need to understand what your total offer is and if it’s good value. Not all people shop on price. It depends on the market and similarity between offerings. Consider too, why people buy from you and what makes them come back?
Using last year’s Profit and Loss Statement is a good base for next year’s predictions. Overlay this with your views on market movements, and any promotions or price changes you have in mind.
Profits and costs
The other balance sheet issue is your operating costs.
- Are there ways to reduce costs and increase your margin, without increasing price? This can include reviewing and reducing stock, warehousing, labour, freight costs etc. Should you look for cheaper suppliers or renegotiate your current contract? How is the Australian dollar going to affect you?
- Expenses are another area, which need to be monitored and held in check.
- Reviewing your cash flow can also highlight areas you need to improve. Putting the right processes in place will help you avoid discounting to collect money owed.
Increasing production can get your unit price down, but are you risking being left with unwanted stock? It’s a fine line.
Are your marketing and sales working for you? Are you measuring the profitability of your promotions?
Your marketing and sales force spending should be considered against how many sales were made, and how much profitability was contributed.
For example, if your product/service has a profit margin of say, 20%, how much of an increase in sales do you need if you had a sale of ‘10% off all stock!’. Is it more or less than 20%?**
If you’re looking to grow, you need to be in position to do it. If you need to expand your premises, production or people there are factors to consider and funding alternatives, which are discussed in more detail here.
You will have to build a business case for securing more funds if the amount required is above your existing credit limits and reserves. This is just as important an exercise for you as it is for your bank. There’s some important factors you need to consider, which we’ve outlined here.
Your cash flow projections will highlight how much cash is required and when. If you break down your new Profit and Loss Statement month by month, you will see if there any potential cash flow tight sports. We’ve highlighted some ways to manage them.
** The answer is a lot more. You need to double sales, at least, as you are halving your margin. This doesn’t include the advertising cost and doesn’t factor in the costs of warehousing, spoilage, depreciation etc.
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Things you should know
General advice: This information is general only and does not constitute any recommendation or advice. It is current at the time of publication, and is subject to change. It has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on the information, consider its appropriateness, having regard to these matters. Consider obtaining personalised advice from a professional financial adviser and your accountant before making any financial decisions in relation to the matters discussed in this document, including when considering the finance options for your business.