How to Apply Profit Planning Systems to Your Business

pIn my previous articles, I discussed in point the basics of the Income Statement and How to a href=http://abcbusinesssuccessblog.businessconsultingabc.com/2010/04/23/maximizing-profits-in-your-business-profit-fundamentals-and-analysis/Analyze a Profit and Loss Statement to Maximize Profits/a, along with a step by step process on How to a href=http://abcbusinesssuccessblog.businessconsultingabc.com/2010/04/26/profit-planning/ target=_blankPlan for Profits/a.nbsp; Pulling this three part Business Profit article series together, in this article I will give real world examples on how Profit Planning and Analysis made for a companyrsquo;s success and the opposite of that, wherever poor Profit Planning made for a Companyrsquo;s failure, giving reasons for the poor profitability. I will show how to apply these Profit Principles to real world business situations as I present three manufacturing companies in the same industry with different profit situations: one that succeed, one that was middle of the road and one that failed. Letrsquo;s get to it!/p
pstrongThe Successful Company:nbsp; Company A/strong/p
pIn examining Company Arsquo;s Income Statement, there are many clues as to why it was a successful company:/p
pstrongem– Market:/em/strongnbsp; Established a market by determining a market need and effectively filling that need. In a five year period sales grew from $11K to $60m in relation to a market that grew from $413M to $510M./p
pstrongem– Expenses:/em/strongnbsp; Expenses were reduced as a percentage of sales over the years, with Engineering and Sales Expenses at year 5 three percentage points below the industry average. The lower engineering costs were attributable to high caliber engineers who designed a superior product which required fewer development changes and allowed employees to concentrate on innovation in the subsequent years./p
pstrongem– Marketing Costs/em/strong were low due to using a network of Distributors to sell the products alternatively than using a large sales force and manufacturing reps. The small sales force was used to concentrate on high volume accounts, giving the company a big return for its investment in its sales people.nbsp; This alone(p) added 7 percentage points to its bottom-line profits./p
pstrongem– Cost of Sales/em/strong was maintained at 62% of sales during the 4supth/sup and 5supth/sup years of operation which provided a 38% Gross Margin.nbsp; This GM is about 10% above the average Break Even Point for similar companies, giving Company A a good cushion of profitability./p
pstrongThe Mediocre Company:nbsp; Company B/strong/p
pCompany B was a six year old company and located in a region of the country that offered lower labor and overhead costs./p
pstrongem– Sales Success:/em/strong Company B had very aggressive pricing strategies and undercut its Competitors to achieve large volume orders. Profit was not the motive; dominance was the fundamental strategy./p
pstrongem– Aggressive Pricing:/em/strongnbsp; In relation to its closest competitor, Company Brsquo;s sales were three times larger, material costs 15 percent lower and labor 5 percent lower./p
pstrongem– Overhead:/em/strongnbsp; This is where Company B made its mistake.nbsp; Overhead expenses were 27%, causing strongCost of Sales /strongto increase to 76%, leaving a Gross Margin of only 24%, which was Break-Even in the best of circumstances when accounting for Engineering, Marketing and Gamp;A.nbsp; This was a ripple effect which greatly reduced Company Brsquo;s profitability, causing the parent company to sell it.nbsp; An acquiring company immediate corrected the Overhead issue and installed a new General Manager to establish better profitability controls, which helped it recover over time.nbsp;/p
pstrongThe Company Failure:nbsp; Company C/strong/p
pCompany C captured 27% of its market, yet failed to stay profitable./p
pstrongem– Management:/em/strongnbsp; Plagued by severe management problems./p
pstrongem– Spending:/em/strongnbsp; Flamboyant and expensive habits./p
pstrongem– Product:/em/strongnbsp; Poor Design and low manufacturing quality./p
pstrongem– Staff Reduction:/em/strongnbsp; As a result of poor management, financial losses and product failures, Company C reduced its staff of 600 to 400 employees.nbsp; The Company afterward fixed its design issues, increased its market share from a significantly lower share of 2% to 4% and grew employment to 150 employees.nbsp; The Company was climbing back and barely keeping its head above water./p
pstrongem– Turnover:/em/strong Company C experienced severe top-management problems, and as a result, lower-management, along with the technical and production ranks, suffered from inordinate employee turnover.nbsp; In a year period, employee turnover was over 100%. Company C as a result experienced a bad repute in the Regionrsquo;s labor pool causing it major difficulties in attracting quality employees. As a result of its low quality labor force, Company Crsquo;s product quality declined and customers were lost. The high employee turn-over created a situation that made it impossible to reduce product costs. Company C was constantly in the training mode and the domino effect of catastrophic events forced it to cease operations./p
pstrongem– The Numbers:/em/strongnbsp; COGS amounted to 84%, leaving only 16% for Engineering, Marketing, Gamp;A and Profit.nbsp; This is clearly out of whack by 20%.nbsp; Material Costs totaling 53% could not be reduced due to high employee turn-over, which created a loss of buying continuity and poor procurement strategies.nbsp; Slow payments to Suppliers contributed to higher material costs since the suppliers increased their prices to compensate for the added costs of doing business with Company C. Company C strove to make improvements, but the improvements were made in the wrong places. Labor Costs were reduced from 8% to 4% and overhead from 10% to 5%, using the same products and predicting inflation rate of 13%. Gamp;A at 3% was reduced dangerously low. The combination of indiscriminate cutting of costs, poor labor quality, poor product quality and very expensive material costs ultimately concerted to doom Company C./p
pstrongWhat can be Learned From Profit Analysis?/strong/p
p By showing how to apply Profit and Loss Fundamentals, Profit Analysis, and Profit Planning to real world business situations, a business owner can now take these applied principles and integrate them into his or her company profit analysis and planning. Seeing how companies successfully and unsuccessfully applied these Profit Principles, the business owner can now advantageously apply these profit strategies to company operations. The Profit and Loss Statement is an excellent place to initiate your Profit Analysis and Planning since it shows how a business has spent its funds in years past and how to projects its spending to be in the future. Moreover, this profit process clearly shows the proportion of revenue stream to expense and cost levels, and whether that ratio is healthy and/or unrealistic./p
pBy understanding what an Income Statement is telling you, how to properly Analyze it for maximal Profits and how to successfully and realistically plan for Future profits, you can significantly increase and sustain better Cash Flows.nbsp; However, the process should not stop here.nbsp; As you have planned to Maximize Business Profits and implemented it successfully through your companyrsquo;s a href=http://www.businessconsultingabc.com/Writing_An_Effective_Business_Plan.html target=_blankBusiness Plan/a,nbsp;Cash Flow Management becomes the next step in the Profitability process. Understanding how cash moves in and out of your business is exremely important in running a profitable and sustainable business./p
pstrongAbout this Article Author/strong/p
p Frank Goley is a business consultant, business turnaround consultant and business plan consultant for ABC Business Consulting. He has been helping companies to succeed for many years. Frank wrote his first business plan over twenty years ago. He is an expert in developing business plans, marketing plans, funding plans, strategic plans, turnaround plans, web marketing strategies,nbsp;and project specific business plans. Frank is also a business coach and a web development, web marketing and web seo consultant. Frank is the author of a business plan book, strongemThe Comprehensive Business Plan Workbook ndash; A Step by Step Guide to Effective Business Planning/em/strong, and he has over 50 published articles on business success strategies. He also writes the Business Success Strategies Blog./p