Owners always say they have a plan. If you do have a business plan, when was the last time it was reviewed or modified? Or is it still in your head, never having seen the light of day? Most companies prepare a budget operating plan by estimating sales levels, usually too optimistically. They then determine what costs they think they need to achieve their profit goal at year end. Their profits become the leftovers of their sales and operating expenses. THIS IS NOT ACCEPTABLE! We refer to this practice as a residual profit plan, and I’ve rarely seen one where the sales are realistic estimates.
We are in favor of what we call a “Profits First” plan and small business owners must be fanatical about living by this plan. And they must be committed to being in the top quartile of their industry. If you’re not trying to be the best you can be, pack it in! Our “Profits First “approach is the only concrete way you can ensure and measure performance among your departments and individual employees.
- Set a clear profit target
- Stick to a prescribed budget
- Measure performance
- Hold everyone accountable
- Control costs
No room for muddy math here. With a “Profits First” plan in place, management has no excuse for failure, because the financial and operational goals of your business are all laid out by the numbers at the beginning of the year. “Profits First” works for any industry. If your company statistically makes 12 percent profits, you set aside the first 12 cents of every dollar and run the business on the remaining 88 cents. There are countless advantages to this system of budgeting and it forces owners to end denial by regularly scrutinizing and adjusting costs.