Mel feller wants you to develop a profit plan for your business by mel feller
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Mel Feller Wants you to Develop a Profit Plan For your Business by Mel Feller Mel Feller describes a Profit planning as simply the development of your operating plan for the coming period. Your plan needs to be summarized in the form of an income statement, which serves as your sales and profit objective and your budget for cost. How Is It Used? The profit plan is used in the following ways: Evaluating operations. Each time you prepare an income statement, actual sales and costs are compared with those you projected in your original profit plan. This permits detection of areas of unsatisfactory performance so that corrective action can be taken.
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Mel feller wants you to develop a profit plan for your business by mel feller
- 1. Mel FellerWantsyou to Developa ProfitPlan For your Businessby Mel Feller Mel FellerdescribesaProfitplanningassimplythe developmentof youroperatingplanforthe coming period.Yourplanneedstobe summarized inthe formof an income statement,whichservesasyour salesandprofitobjective andyourbudgetforcost. How Is It Used? The profitplan is usedin the followingways: Evaluatingoperations.Eachtime youprepare anincome statement,actual sales andcostsare compared withthose youprojectedinyouroriginal profitplan.Thispermitsdetectionof areasof unsatisfactory performance sothatcorrective actioncan be taken. Determiningthe needforadditionalresourcessuchasfacilitiesorpersonnel.Forexample,the profit planmay showthat a sharp increase inexpectedsaleswill overloadthe company'sbillingpersonnel.A decisioncanthenbe made to add additional invoicingpersonnel,toretainanEDP service,orto pursue some otheralternative. Planningpurchasingrequirements.The volume of expectedsalesmaybe more thanthe business'usual supplierscanhandle orexpectedsalesmaybe sufficienttopermittakingadvantage of quantity discounts.Ineithercase,advance knowledgeof purchasingrequirementswill permittakingadvantage of costsavingsand ensure thatpurchasedgoodsare readilyavailablewhenneeded. Anticipatinganyadditional financingneeds.Withplanning,the searchforneededfundscanbeginas earlyas possible.Inthis way,financial crisesare avoidedandfinancingcanbe arrangedon termsthat are more favorable. Advantages of ProfitPlanning Profitplanningoffersmanyadvantagestoyourbusiness.The modestinvestmentintime requiredto developandimplementthe planwill payliberal dividendslater.Amongthe benefitsthatyourbusiness can enjoyfromprofitplanningare the following:
- 2. Performance evaluation.The profitplanprovidesacontinuingstandardagainstwhichsales performance andcostcontrol can quicklybe evaluated. Awarenessof responsibilities.Withthe profitplan,personnelare readilyaware of theirresponsibilities for meetingsalesobjectives,controllingcosts,andthe like. Cost consciousness.Since costexcessescanquicklybe identified andplanned,expenditurescanbe comparedwithbudgetsoftware evenbefore theyare incurred,costconsciousnessisincreased, reducingunnecessarycostsandoverspending.. Disciplinedapproachtoproblemsolving.The profitplanpermitsearlydetectionof potential problems so that theirnature andextentare known.Withthisinformation,alternatecorrective actionscanbe more easilyandaccuratelyevaluated. Thinkingaboutthe future.Toooften,small businessesneglecttoplanthinkingaboutwhere theyare today,where theywill be nextyear,orthe yearafter.Asa result,opportunitiesare overlookedand crisesoccur that couldhave beenavoided.Developmentof the profitplanrequiresthinkingaboutthe future sothat many problemscanbe avoidedbefore theyarise. Financial planning.The profitplanservesasabasisfor financial planning.Withthe information developedfromthe profitplan,youcananticipate the needforincreasedinvestmentinreceivables, inventory,orfacilitiesaswell asanyneedforadditional capital. Confidence of lendersandinvestors.A realisticprofitplan,supportedbyadescriptionof specificsteps proposedtoachieve salesandprofitobjectives,will inspire the confidence of potential lendersand investors.Thisconfidence will notonlyinfluencetheirjudgmentof youasa businessmanager,butalso the prospectsof your business'successanditsworthinessforaloanor an investment. Limitationsof Profit Planning Profitplansare baseduponestimates.Inevitably,manyconditionsyouexpectedwhenthe planwas preparedwill change.Crystal ballsare oftencloudy.The furtherdownthe roadone attemptsto forecast,the cloudiertheybecome.Ina year,anynumberof factors can change,manyof thembeyond the control of the company.Customers'economicfortunesmaydecline,suppliers'pricesmayincrease, or suppliers'inabilitytodelivermaydisruptyourplan.
- 3. The profitplanrequiresthe supportof all responsible parties.Salesquotasmustbe agreeduponwith those responsible formeetingthem.Expensebudgetsmustbe agreeduponwiththe people whomust live withthem.Withoutmutual agreementonobjectivesandbudgets,theywill quicklybe ignoredand serve nouseful purpose. Finally,profitplansmustbe changedfromtime totime tomeetchangingconditions.Thereisnopointin tryingto operate a businessaccordingtoa planthat isno longerrealisticbecause conditionshave changed. Advantages vs. Disadvantages Despite the limitationsof profitplanning,the advantagesfaroutweighthe disadvantages.A realistic plan,establishedyearlyandreevaluated,aschangingconditionsrequire will provide performance guidelinesthatwill helpyoucontrol everyaspectof yourbusinesswithaminimumof analysisand diggingforfinancial facts. Guide Objectives In this article,you will learn how to do the following: Developaforecastforsalesandgross profit,consideringall of the variousinternal andexternal factors that are relevanttothe forecast. Developbudgetsforoperatingexpensestoquicklydetectexcessive expensessothatcorrective action can be takenandpurchasingcommitmentsheldwithinbudgetarylimits. Estimate netprofitsothat youcan determinewhetherthe projectedreturnonyourinvestmentis satisfactory.Youwill alsobe able eithertodetermine how muchcashwill be generatedfromoperations for reinvestmentinthe businessortocompensate ownersfortheirinvestment. ForecastingSales and GrossProfit
- 4. Developmentof yourprofitplanshouldusuallybeginwithaforecastof yourexpectedsalesandgross profitforthe comingyear.The salesandgross profitmustbe considered togethersince theyare so closelyinterrelated.Grossprofitpercentagesare determinedbypricingpolicy,whichalsoaffects expectedsalesvolume.A decisiontoincrease the expectedgrossprofitpercentage will usuallytendto decrease expectedsales, while reducingthe expectedgrossprofitpercentage shouldincrease sales. A secondmajorreasonfor beginningthe profitplanwithasalesforecastisthatthe volume of expected salesoftendeterminesanumberof otherfactors suchas the following: Expectedchangesinvariable expenses,those expensesthattendtochange in directproportionto changesinsales.These couldinclude expensessuchassalescommissionsordeliverycosts. The impact of the addedsalesvolume onthe variousfixedcostsof operatingyourbusiness.Thesecosts, by definition,donottendto varyin directproportiontochangesinsalesvolume.However,substantial increasesinsalesoveranextendedperiodcanforce anincrease inmanyfixedexpenses.Forexample,a salesincrease realizedthroughthe additionof manynew accountscouldaffectbookkeepingandcredit costs. The abilityof presentresourcessuchasstorage space,displayarea,deliverycapability,orsupervisory personnel toaccommodate the addedvolume. The needforfundsto investinincreasedinventoryoraccountsreceivable toaccommodate sales increases. Cash generatedfromoperationstomeetcurrentoperatingneedsaswell asexpansionrequirements, debtrepayments,andowners'compensation. Realism A realisticsalesforecastmustrelyoncareful analysisof marketpotential andthe abilityof yourbusiness to capture its share of thispotential.The forecastshouldnotbe basedupon"whatyouwouldlike todo" or "what youhope to do."It mustbe "whatyoucan do"and "whatyou will do."
- 5. Anyforecastof a salesincrease mustbe supportedbyrealisticexpectationsforstrongermarketdemand and specificmarketingstepsthatwill be takentocapture a share of thismarket. The keyto successful forecastingisrealism.Youonlyfool yourself if yourejectrealityinforecasting. Such forecastsserve neitherasa realisticplanningbasisnorasa reliablemeansof performance evaluation. Your forecastcan be the basisforimportantdecisionssuchasdecisionstoaddpersonnel,lease additional facilities,orincrease promotional costs.If these decisionsare baseduponunrealisticsales expectations,anymoneyexpendedonthemwillbe wasted. Forecastsare oftenpresentedtolendersorpotentialinvestorstoguide themintheirdecisions.If they lack confidence inyourforecast,theywill certainlybe reluctanttocommittheirfundstoyour business. Everyforecastshouldbe supportedbycarefullyconsidered,specificactionplans.Itisinadequate to forecasta salesincrease of 20% or 30% withoutplansforspecificactionstoachieve the increase.These actionscouldinclude the introductionof new products,openingof new branches,marketexpansion, commitmentsfromnewcustomers,increasedrequirementsfromexistingcustomers,additional salespersons,oranintensifiedpromotional efforttoattract new customers. AnalyzingCurrent Salesand GrossProfit Your salesandgross profitforecastbeginswithanalysisof currentperformance.Salesare usually dividedintovariouscategories.Eachcategoryisexaminedindividuallytodetermineexpectedsalesfor the comingyear. SelectingSalesCategories The selectionof categorieswill dependuponthe nature of yourbusiness.Forexample,afoodbroker sellingtoalarge numberof relativelysmallaccountsmightbe interestedprimarilyinanalyzingsalesby product.The ownerof a single retail store mightchoose toanalyze salesbysellingdepartment,while the ownerof a retail chainwouldprobably be interestedinanalyzingsalesbyoutlet.Aninsurance brokerwithseveral agentsmightcategorizesalesbyagent.Anindividualwholesalermightconsider salesbysalesterritory.
- 6. Factors AffectingSales Aftercategorieshave beenselectedandcurrent salesdividedamongthem, the variousfactors,which can affectsalesineachcategory,must be considered.Thesefactorscouldbe eitherinternal orexternal. Internal factorsare those that youcan influence.External factorsare those thataffectthe market servedbyyourbusiness,butare generallybeyondyourcontrol. Internal Factors The followingare typical internal factors that could influence yoursalesforecast: Promotional plans Expansionplans Capacity restrictions Newproduct introductions Product cancellations Salesforce changes Pricing policy Profit expectations Market expansionto new customersor territories External Factors
- 7. Among the external factors that must be consideredare the following: Businesstrends Governmentpolicies Inflation Changesin populationcharacteristics Economic fortunesof customers Changesin buying habits Competitive pressures AnalyzingGrossProfitPercentages It isoftenuseful tobeginasalesforecastwithanexaminationof yourcurrentgrossprofitpercentage (markuppercentage orgrossprofitpercentage).The grossprofitpercentageisusuallythe bestindicator of pricingpolicy,whichcanhave significantimpactonsalesvolume.Tosome extent,the grossprofit percentage will also reflectthe buyingeconomiesof yourbusiness.However,the range overwhichcosts of purchasedgoodswill varyisnotordinarilyaswide asthe possible range of pricesyoumayseekfor your products. Three Bases of Comparison Examinationof current grossprofitpercentagescanindicate the needforpricingpolicyrevisionsto meetcompetitionorcloserattentiontopurchasingcostsinorderto provide extragrossprofitwithout increasingprices.
- 8. The evaluationof gross profitpercentagesrequirescomparison of current performance with three bases: Objectivesoriginallysetfor the current year, ifavailable Other businessesinthe same industry Resultsof prior years Comparisonwithobjectivespermitsyoutodetermine how well youhave done comparedwithyour original expectations.Assumingthatthese objectiveswererealistic,thisisoftenthe bestsingle performance indicator.Deviationsfromobjectivescanquicklybe identifiedandexploredindetailto determine the cause of the deviation. Comparisonwithindustryaveragespermitsidentificationof areaswhere the experience of similar businessesindicatesroomforimprovementinyourown. Unfortunately,businessesare oftentooquicktodismissthe applicabilityof industryaveragestotheir ownoperation, claiming"Ourcircumstancesare different."Suchanattitude isself-defeating.Itprevents youfrom takingadvantage of the experience of otherstoimprove yourownsalesandprofit.A farmore productive attitude istosay,"If everybodyelsecanrealize agrossprofitof x percent,thenwe shouldbe able to."Until specificcircumstancesare identifiedthatmake itimpossibleforyourbusinesstobe consistentwithindustryaverages,everyattemptshouldbe made tobringperformance in line withthe experience of others. Comparisonof currentoperationswithperformance inpriorperiodspermitsdetectionof trendssothat progress,or the lackof it,can be identified.Italsopermitsevaluationinlightof those specific considerations thatmaybe unique toyourbusiness.Forexample,if yourgrossprofitasa percentage of salesislowcomparedwiththe industry,analysisof yourhistoricperformance mayreveal the cause of thisapparentdeficiencysuchasreliance uponamajor customerwhere severe competitionrestrictsthe available grossprofitpercentage. Evaluating GrossProfit Percentages
- 9. Refertothe table below,whichisananalysisof grossprofitpercentagesrealizedbyWesternAppliances inthe yearXXXX.Percentagesare shownforcostof sales,grossprofit,total expenses,andprofitbefore taxesas follows: XXX2 actual XXX1 actual Industryaverage XXX2 objective Each basisof comparison providesa differentviewpointofthe company'soperations. WESTERN APPLIANCES, INC.ProfitPercentageAnalysis In XXX2,WesternAppliances'grossprofitwas20.0% of sales.Thisrepresentedanimprovementover theirXXX1performance of 19.5%, the industryaverage of 18.2%, and theirXXX2objective of 19.3%.By any of these measures, thisshouldbe consideredfavorable.Apparently,theywere able tocontrol their purchasingcostsand realize adequate pricesinordertoimprove upontheirownpreviousgrossprofit performance aswell asthe industryaverage. Conflicts Sometimesfinancialanalysiscanleadtoconflicting conclusions derivedfromidentical facts.Comparing WesternAppliances'20.0%gross profitwiththe 18.2% industryaverage couldraise questions.If WesternApplianceswere more competitive initspricing,coulditcapture alargermarketshare?A reasonable answertothisquestionwoulddependuponthoroughknowledgeof theiroperationsandthe experience of theirsalespersonnel indealingwithspecificcustomers.Perhapstheirpricingisfully competitiveintheirareaor local retailersare willingtopayslightlymore becauseof the superior servicestheyoffer.If thisisthe case, price-cuttingmightonlytrimprofitmarginswithnorealistichope of additional salesvolume tooffsetthe effectsof the price reduction.
- 10. On the other hand, iftheir gross profitpercentage were belowthat of the industry,a numberof other questionswouldbe raised,such as the following: Are theypurchasingat pricesthat are too highto provide anadequate grossprofit? Is theirpricingstructure solowthat adequate grossprofitmarginscannotbe attained? Are salespersons tooquicktocut prices? Is theirmarketingefforttooheavilyconcentratedinthose productlinesthatofferarelativelylow gross profitpercentage? Is theirmarketingeffortdirectedtowardthose high-volume accountsthatare so highlycompetitivethat gross profitmustbe trimmedtoan unrealisticallylow level? Analysisof SalesPerformance The table shown below analyzesthe XXXX salesof WesternAppliancesbyaccount.Actual sales,gross profit,andthe gross profitpercentage are shownindividuallyformajoraccountsandas a groupfor smalleraccounts.These are reportedonthe bottomline andrepresent50small retailersservedby WesternAppliances. Let usconsiderAppliance Mart,one of the major accountsshown. In XXX2,WesternAppliances'salestoAppliance Martwere $150,000. These salesgeneratedgrossprofit of $27,000, or 18. Percentage of sales. In XXX3,WesternAppliancesexpectsa general price increase of 5% withnochange in the discount structure available tothemfromtheirsuppliers.
- 11. Appliance Mart'sbusinessinXXX3isexpectedtobe affectedonlybygeneraleconomicconditionssuch as the 5% price increase andanexpected10% industrygrowthinconsumerdemandforelectrical appliances. Appliance Martoperatesa chainof discountstoresinan economically stablesuburbanarea.ForXXX3, theyhave no planstoadd or eliminate anystores.There are nochangesexpectedinWestern Appliances'relationshipwiththemthatwouldmateriallyaffectsales. Therefore,the onlyfactorsaffectingthe salesforecastforAppliance Martwouldbe the planned5% price increase andthe general 10% increase indemand.SalestoAppliance Martin XXX3couldthenbe forecastas follows: $174,000 x 0.180 = $31,320 Thisamounthas beenroundedto$31,300 and enteredinthe grossprofitforecastcolumn. SubdividingSalesCategories It isoftenuseful tosubdivide salesintomore detailedclassificationsinordertodevelopamore precise forecastsuch as potential salestoa single customer.Asanexample,refertothe table below,Western Appliances'salessummarybyproductline toGiantDiscount,itsmajorcustomerinXXX2.Sales,gross profit, andthe gross profitpercentage are shownbyproductline sothat eachline maybe considered separatelytodeterminearealisticforecastforXXX3. WESTERN APPLIANCES,INC.CustomerSalesAnalysis - GiantDiscount Giant Discountplanstodiscontinue its salesof automotive radiosinXXX3.Therefore,sales,grossprofit, and the gross profitpercentage forall are shownaszero onthe table above. Sales,grossprofit,andgrossprofitpercentageshave all beendeterminedforthe remainingproduct linesandshownonthe XXX3 forecastonthe table above.Youwill note thatthe grossprofitas a percentage of total salesinthe XXX3forecast,14.0%, is well below the XXX2experienceof 15.0% even thoughthe gross profitoneach productline remainsthe same. Thisisdue tothe eliminationof the highlyprofitable automotiveradioline whichproduceda30% gross profitbutisbeingdiscontinuedfrom
- 12. Giant Discount'sstores.Infact,the net effectof thisdiscontinuationisthatWesternApplianceswill realize additional grossprofitof lessthan$1,000 on salestoGiant Discountdespite asalesincrease of almost$24,000. Thisimportantfact probablywouldnothave beenrevealedif salestoGiantDiscount had notbeensubdividedintoindividualproductlinesforanalysis. Thisnegligible increase ingrossprofitwillprobablybe more thanoffsetbynormal costincreasesin variousexpenseaccountsrequiredtohandle GiantDiscount'sbusinessinXXX3,Atthispoint,the ownersof WesternApplianceswouldbe well advisedtotake ahard lookat theirpricingstrategytosee if more favorable pricescanbe realizedinanyproductline withoutanysignificantsaleslosssothatthe gross profitearnedfromthis,itslargestaccount,can be improved. DevelopingExpense Budgets Aftera realisticforecasthasbeendevelopedforsalesandgrossprofit,expensesforthe comingyear mustbe estimatedinordertoestablishexpense budgetsandtodetermine expectedoperatingprofit. Comparisons As withthe forecastof salesandgross profit,expense estimatingbeginswithareview of the current year'sperformance baseduponcomparisonwiththe followingindicators: Performance inpriorperiods Industryaverages Objectivesestablishedforthe currentyear For purposesof comparison,itisoftenuseful toexpresseachexpense asapercentage of total sales. ComparingVariable Expenses
- 13. The use of percentagesasa basisof comparisonand forecastingisparticularlyapplicable when analyzingvariable expenses.Variableexpensesare those thattendtochange because of changesin salesvolume.Forexample,if salespersons’ commissions were baseduponapercentage of sales,the total dollaramountof commissionsearnedwouldincrease assalesincrease.If salesinamonthwere 20% higherthanexpected,commissionspaidwouldalsoincrease20% as a directresultof the higher salesvolume. Comparing FixedExpenses On the otherhand,fixedexpensesare notdirectlyaffectedbyshort-termvariations insalesvolume. Therefore,a20% increase inthe dollaramountof any fixedexpensesuchassalariesorrent would normallybe consideredunacceptable evenif salesforthe periodincreasedby20%.When comparing fixedexpenselevelswithobjectivesorfromone periodtoanother,itismore realistictomake comparisonsinabsolute dollarsratherthaninpercentages. A businesshassalesandrentexpenseinJanuary,February,andMarch as follows:Rentexpense As a percentage of sales,rentexpensewashighinFebruaryandlow inMarch. However,thisdoesnot indicate thatcontrol of thisexpense wasmore orlesseffective ineithermonth.Itsimplyreflectsthe changesinsalesvolume.Inall three cases,the actual rentexpense was1,000. Long-Range Considerations Despite the shortcomingsof usingpercentagestoevaluatefixedexpense control withinthe business frommonthto month,theycan be useful whenmakinglong-termcomparisonsorcomparisons with industryaverages.These averagesnormallyexpressexpensesaspercentagesof sales,regardlessof whethertheyare fixedorvariable. For example,assumethatabusinessfoundthatitsrentexpense asapercentage of saleswas2% comparedwithan industryaverage of 1%.Thisdifferential wouldhave tobe offsetbybetterthan average performance ingrossprofitorotherexpense classificationsif the businessexpectstorealizenet profitequal toitsindustryaverage.Perhapsthe reasonforthe highpercentage isdue toan exorbitant rental expense,oritmay be causedby inadequate sales.Ineithercase,certainquestionsmustbe answered.These couldinclude the following:
- 14. Are we rentingmore space than we need? Is our space too expensiveforourrequirements? Coulda lesselaborate facilitybe locatedthatwouldbe adequateforourneeds? Woulda lesscostlylocationbe sufficient? Is our space utilizationinefficient? Will expectedsalesincreasesbe handledwithoutrentingadditional space?Willthisbringourrent expense percentage inline withthe industry? Can the terms of our lease be re-negotiated? Similarly,whencomparinglong-termperformancewithpriorperiods,the use of fixedexpense percentagescanbe helpful.Forexample,if youfoundthatwarehouse salariesjumpedfrom2% of sales to 4%, a numberof importantquestionswouldbe raised.These couldincludethe following: Are we now usingtoomanywarehouse personnel? Are warehouse personnel lessefficient? Has ineffectivenesscreptintothe warehouselayoutoroperatingprocedure? Are warehouse workersoverpaid? Is warehouse supervisioninadequate? IdentifyingExcessive Expenses
- 15. At WesternAppliances,noobjectiveswere available forXXX2performance.Therefore,excessive expensescanbe identifiedonlybycomparisonwithXXX1results,and,insome cases,withindustry averages. Industry Average Comparisons Comparisonswithindustryaveragesare notavailable inall of WesternAppliances'expense accounts. However,thiscanbe determinedbyexaminingthose accountsonthe company'sincome statementthat can be combinedforcomparisonwithindustryaverages. Forexample,the industryaveragesshowthat office salariesforthe industrywere 4.9% of sales.Examiningthe operatingexpenseaccountsatWestern Appliances,the accountsthatwouldappeartofall intothisclassificationare the following: Salary- Office Manager1.4% Salaries- Clerical 1.0% Salaries- Warehouse 1.8% The total of these expenses,4.2%of sales,comparesfavorablywiththe industryaverage of 4.9%. ComparisonwithPreviousPeriods The informationpermitscomparisonof all expenses inXXX2withXXX1results. The onlyvariable expense atWesternAppliancesinXXX2is salespersons’ commissions.These represented2.0%of salesinbothXXX1and XXX2.Therefore,theywouldnotappeartobe excessive. In the fixedexpenseaccounts,sharpincreasescouldbe notedinthe followingaccountsandwould warrant reviewand possible correctiveaction.
- 16. ComparingWesternAppliances'XXX2fixedexpenseswithitsexperience inXXX1,significantincreases are notedinalmosteveryaccount.Some of these increasesshouldbe regardedwithmore concernthan othersregard and therefore givenpromptattention.Reasonsforthe increasesandpossiblecorrective actionmust be determined. Some increaseswere probablyunavoidable,havingbeendictatedbycontract,legal requirements,or price increasesbeyondthe company'scontrol.Otherscouldprobablybe reducedwithclosercontrol. For example,travelandentertainmentexpensejumpedfrom$10,000 to $13,000, an increase of $3,000. Thissharp increase shouldindicate thatacloserlookat all travel and entertainmentexpendituresisin orderto determine whetherornot all were necessary.Couldsome have beenavoidedbyrestricting salesmen'sexpense accounts?Couldmore economical meansof travel have been used?Couldthe companyeliminateunnecessarytripsthatresultedincostsfar beyondanyreal value tothe business? Suppliesexpense doubledfrom$1,000 to $2,000 althoughthe volume of businessincreasedbyonly about10%. Thissalesincrease wouldnot seemtoindicate aneedforsucha sharp increase insupplies usage.Suchan expense couldbe controlled bycloserattentiontopurchasingproceduresandsupplies issuedtoemployees,use of lessexpensivesupplieswhere possible,andsoon. DeterminingExpense Budgets Budgetsforeach expense mustbe established,consideringbothexternal andinternal factors,asinsales forecasting. From the standpointof expense budgeting,the followingwouldbe consideredinternal factors: Corrective actionsplannedtobringexcessive expensesinline. Policychangessuchas newcommissionplans. Commitmentssuchasequipmentpurchases,leasesonnew facilities,orprofessional service contracts. Plannedsalaryincreases.
- 17. Plannedchangesinbenefitprograms. Additional personnel. Promotional plans. External factorscouldinclude the following: Inflationanditseffectonprice increasesfromsuppliers. Tax rate increasesincludingpayroll taxes,local propertytaxes,inventorytaxes,andsoon. Utilityrate increases. Additionally,the interrelatedeffectsof expense increasesmustbe considered.Forexample,payroll increaseswill increase payroll taxesand,possibly,employee benefits.Rentonlargerfacilitiescanalso involve additionalutilitiesexpense. Initial Forecast The table belowshowsWesternAppliances'initial forecastforXXX3operatingexpenses. The owner'ssalarywill be increasedfrom$24,000 to $26,000. The office manager'ssalarywill be increasedfrom$17,000 to $18,000. Salespersons’ salarieswill remainunchanged. The expectedsalesincreasewill cause salespersons’ commissions,2% of sales,toincrease from$24,000 to $28,000.
- 18. Warehouse salarieswill be increasedabout5% from$22,000 to $23,000. Clerical salarieswill be increasedabout17% from$12,000 to $14,000. Payroll taxes,approximately8%of total compensation,will increase to$10,000 because of the compensationincreases Employee benefitsexpense isexpectedtoincrease fromthe present$8,000 to $9,000. Thisincrease is dictatedbyincreasedpremiumcostsforemployees'healthinsurance. Rentexpense will increase from$9,000 to $10,000 due to a tax escalatorclause inthe lease agreement and a proposedmunicipal tax increase. Utilitiesexpense isexpectedtoremainunchangedat$4,000. Telephone expenseisexpectedtobe reducedfrom$4,000 to $3,000 because of tightercontrols introducedbymanagementinresponsetothe sharpincrease inXXX2. Newcontrolsonsuppliesshouldholdthisexpense at$2,000 despite price increases. To increase sales,the advertisingandpromotionbudgetwill be increasedfrom$13,000 to $15,000, a 20% increase. Throughtightercontrol,the ownerexpectstorestricttravel andentertainmentexpense tothe XXX2 level of $13,000 despite the general increaseintravel-relatedcosts. Freightexpense will increase from$16,000 to $18,000 reflectingthe increasedsalesvolume andhigher freighttariffs. Professionalfeesare expectedtoremainat$5,000.
- 19. Depreciationexpense will increase from$6,000 to $8,000 due to the additionof new receiving equipmentbeingpurchasedatacost of $10,000 and depreciatedover5years. Total operatingexpenseswill increase from$200,000 to$218,000. Profitbefore interestandtaxeswill be $62,000, an increase from$40,000 inXXX2 WESTERN APPLIANCES,INC.SalesAndExpense ForecastJanuary1 To December31, XXX3 Reevaluatingthe Plan Once an initial planhasbeenestablished,itisoftenuseful toreviewitinorderto identifyareas of furtherimprovement. In the example of WesternAppliances,the expectedprofitbefore income taxes,3.2% of sales($46,000 : $1,400,000), is well above the industryaverageof 2.5% and no extensive reevaluationappearsneeded. Summary Too often,the ownersof small businessesrelyupontheireyesandearstotell them whetherthe performance of theirbusinessisuptopar. Unfortunately,oureyesandearsoftenbetrayus.The sales representative withthe glibtongue andquickwitmayappearto be your star performerwhilethe facts, actual salesandprofit,mayshowthat someone elseisdoingafar betterjob.The secretarywho constantlyappearsbusymaybe far lessefficientthananotherwhoworksina more organizedfashion withfewererrorsandlessneedforduplicate effort. There are alsomanyaspectsof a businessthatoureyesandears cannotalwayssense.Changesinthe market,shiftsincustomers'economicfortunes,andgradual butseeminglyirreversible increasesincosts can developintocrisesunlesstheyare detectedatan earlystage andeffective actionistakenpromptly. Performance Evaluation
- 20. The establishmentof aprofitplanpermitsyouto evaluate performance inyourbusinessbasedupon facts,not uponrandom observations.Certainly,there isnosubstitute forthe "gutfeel"of the small businessownerinmakingtheseimportantdecisionsthataffectthe prosperityof the business.However, the effectivenessof the owner'sgutfeel,whencombinedwithfacts,candramaticallyincreasethe accuracy of managementdecisions. Profit Plan Witha well-consideredprofitplan,out-of-line conditionscanbe detectedatthe earliestpossible date. Corrective actioncanbe taken promptly,eliminatingthe erosiveeffectof continuinglossesaswell as the needto reactin a time of crisis.The profitplanalsopermitsthe ownertoagree upon specific responsibilitieswithall employeeswhoare ina positiontoinfluence salesorcosts.Theirperformance can be evaluatedandanydeficienciesbroughttotheir attentionsothattheycan participate inthe developmentof corrective actionplans.Asafurtherplus,the disciplinedthinkingaboutthe future will permityouto foresee manyproblemsbefore theyoccurandassistyouin anticipatingopportunitiesin your marketthatwill permityoutobuildyourbusinessforgreatersalesandprofit. Mel Feller– Personal Development,Business,Executive,InternetandReal Estate Investments Coach/Mentor and BusinessOwner Mel Fellerwasaseniorstafferforover5 yearswithbothUnitedStatesSenatorJake Garn and The Senate BankingandFinance Committee. Mel Fellerisaspeakeratentrepreneurial forumstrainingbusinessprofessionalsonmarketingstrategies and the “Secretsof Online Marketing”.He providesconsultingservicesonall aspectsof business includingorganizational performance,salesandmarketingstrategies,employee productivityand retention,successful solutionimplementation,technologyleverage andcustomerserviceinall business and fields. Mel Feller'sareasof technologyexpertise include emailsandsocial media,solutiondevelopment disciplineandmethodology,businessprocessleadsandprojectmanagement. Mel Fellerhastwenty-fiveyears’experience withcompanies,nonprofitsandindividualsinthe research and writingof bothgovernmentandprivate grants.
- 21. In additiontohisregularconsultingandmanagementresponsibilities,Mel Fellerwaspublishedinthe Top 100 Mentors;he has publishedtwobookson"CreativeReal Estate Financing"and“MultipleSecrets to Success”,andpresentednumerousexecutive lecturesforFortune 500 corporationson“leadership and businesspractices”. Visithimatwww.melfeller.com andwww.melfellersuccessstories.com Mel Feller’sdynamicpresence,instinctive strategicvision,andcreative thinkingproduce effective, sustainable bottom-lineresultsforhisclients.His“CanDo” attitude generatesconfidence inhis executivecoachingclientsandstrategicconsultingcorporate clients.ThroughoutMel Feller’scareer,he has increasedthe profitabilityof nearlyeveryorganizationwithwhichhe hasworked. Mel Fellerhasaunique abilitytorelate tohisclientsbecausehe came fromThe UnitedStatesSenate, where Mel wasthe Chief of Staff fora UnitedStatesSenatorandwas alwaysmeetingwithprominent businesspeople orpoliticians. Hismainlove wasdealingwithconstituentsthatwere the grassroot voters! Since foundingCoachingForSuccess360 In 1989, he has effectivelytranslatedthatexperience intoresultsforhisclients.He focusesonseparatingdailydistractionsfromthe real issuesinordertoput the executive and/orbusinessonthe rightpathto grow and prosper.Resultsare immediate,growth sustainable,andprofitabilitylong-term. Dozensof Mel Feller’sclientshave beenonInc.’s500/5000 listandmany have beennamedasa “Best PlacesTo Work. UsingMel Feller’sintuitive,systematicapproach,andourprovenstrategicandtactical tools,we help youplan forprofit. Mel Fellerbelievesthatwhatgetsmeasuredisimproved.Therefore,he iscontinuallydeveloping processesandsystemsthatallowyoutoeasilymeasure,manage andmaintainahighlyprofitable business. Mel Felleris readytohelpyouincrease yoursales,trimandmanage youroperatingcostsand see your profitssoarand/or leverage yourtime forBusiness orReal Estate! “Truth telling,honesty,andcandor:IlovedyouMel Feller!Youhave somuch energyandknowledge!I trulyhope I getanotheropportunitytobe coachedby you.I see myself alittle clearernow,andit’snot so bad.”
- 22. Lisa Mathews “Mel Felleryouaddedmore value thanwe canpossiblysee rightnow.Mel Feller,youare warm, inviting,andaccommodating.Thankyouforcomingalongside usinthistransition!” VanessaCavanaugh “Mel Fellerthe besteducationsessionthatwe have attendedin manyyears!Thankyousomuch — I am veryexcitedtoputeverythingyouhave taughtusintopractice!” Michael Randolph “Mr. Mel Feller,Thankyou,thankyou,thankyoufor givinga marvelouskeynote atourSymposium! While we have notyetcollectedthe official feedback,the unofficialfeedbackwasthatYou Were a Hit! I heardnothingbutcomplimentsregardingyourpresentations.Thankyouformakingsucha positive impacton our attendees!” Lyle CunninghamVP "Mel Felleruseshishumor,compassion,and directnature tohelpbringoutthe bestinme.Mel Felleris committedtohelpingme live...Imean,reallylive,life toitsfullest." Jose Rodriguez Mel FellerLinks https://www.instagram.com/mel.feller https://ourmrmel.tumblr.com/ https://www.pinterest.com/cfs360/ https://twitter.com/melfeller https://wordpress.com/page/melfellerinternetbusinessinnovations.wordpress.com