An Intelligent Way to Guarantee Business Profits
Business owners often say that they have a financial plan. The
chances are that it is either in their head or gathering dust in a file
somewhere.
One of the secrets of running a business is to have a strong flexible plan for making profits. Running your business month to month, or week to week means that you will always be playing catch-up to fund expenses.
Typically, most companies have an optimistic guess or estimate sales and then figure out what the cost of achieving those sales are going to be. The dollars left over is called profit. It comes last. It's the bottom line. Effectively, it is last in the list of priorities.
This method which is very common, could be described as "residual budgeting." There are several fundamental flaws with this approach. The profits are vulnerable to changes in the marketplace that are outside the control of the business owner. Let's say there's a downturn in the economy and sales plummet.
Instead of making the necessary cuts as sales deteriorate, most business managers hope to make it up in the next quarter. This means that profit levels just evaporate.
An alternative approach would be to set a percentage profit rate. For example, if the profit rate was set at 15% and the budgeted sales were $2 million, the business operating profit would be $300,000. This would leave an expense budget of $1.7 million.
Running a business like this means that all expenses cannot exceed the expense budget of $1.7 million. The business has to run within its budget and expenses must be cut if they exceed the set levels.
By taking the profit first and making sure that 15 cents in every dollar of revenue goes to the business rather than operating expenses, the profit margin is preserved.
The message is simple. Set a clear profit target. Stick to the prescribed budget and hold everybody accountable for achieving that target. Take the first 15 cents of every dollar that comes into your business and pay salaries and other operating costs out of the remaining 85 cents.
Many business owners consider this method to be impractical. However, there are sufficient successful businesses practicing this method to prove them wrong. It's a question of leadership and financial management.
One of the secrets of running a business is to have a strong flexible plan for making profits. Running your business month to month, or week to week means that you will always be playing catch-up to fund expenses.
Typically, most companies have an optimistic guess or estimate sales and then figure out what the cost of achieving those sales are going to be. The dollars left over is called profit. It comes last. It's the bottom line. Effectively, it is last in the list of priorities.
This method which is very common, could be described as "residual budgeting." There are several fundamental flaws with this approach. The profits are vulnerable to changes in the marketplace that are outside the control of the business owner. Let's say there's a downturn in the economy and sales plummet.
Instead of making the necessary cuts as sales deteriorate, most business managers hope to make it up in the next quarter. This means that profit levels just evaporate.
An alternative approach would be to set a percentage profit rate. For example, if the profit rate was set at 15% and the budgeted sales were $2 million, the business operating profit would be $300,000. This would leave an expense budget of $1.7 million.
Running a business like this means that all expenses cannot exceed the expense budget of $1.7 million. The business has to run within its budget and expenses must be cut if they exceed the set levels.
By taking the profit first and making sure that 15 cents in every dollar of revenue goes to the business rather than operating expenses, the profit margin is preserved.
The message is simple. Set a clear profit target. Stick to the prescribed budget and hold everybody accountable for achieving that target. Take the first 15 cents of every dollar that comes into your business and pay salaries and other operating costs out of the remaining 85 cents.
Many business owners consider this method to be impractical. However, there are sufficient successful businesses practicing this method to prove them wrong. It's a question of leadership and financial management.
Thank you for reading this article. Peter L Mitchell invites you
to visit his web site where you will discover a wealth of resources such
as free downloads, ideas, articles, information and books, This site is
updated nearly every day. Click here http://plmitchell.com/
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