I just gave myself a 20% raise for 2012. To totally understand the significance of my opening sentence, you need to know that I am the only employee in my company and 100% of my income comes from business consulting, sales training and the income I earn from selling the books, CDs and DVDs I have developed.
So how did I give myself a raise for 2012? I planned it. I decided I wanted to earn 20% more income in 2012 than I earned in 2011 and I jotted down on a piece of paper how many days of consulting, how many days of sales training and how many of each of my training products I need to sell in order to achieve my goal.
This was the easy part. The hardest part is developing an effective marketing plan that will allow me to achieve my sales goal, and then executing my marketing plan according to schedule. I learned this many years ago at a marketing seminar I attended. The seminar leader told the audience, “You can’t hit a target you cannot see.” A profit plan must be specific, in writing and closely monitored throughout the year.
I realize it’s already January of 2012, but if you have not yet prepared a profit plan for your business, it’s not too late, but you shouldn’t delay any longer. In my old company, we developed a highly effective process for arriving at our annual profit plan and I believe it will work for your business as well as it did for us.
The Profit Planning Process
1. Using whatever method you wish, set an earnings goal for 2012. You can use a return on investment, a return on assets or even a specific increase over and above what you earned in 2011, but however you decide to arrive at your bottom line goal, record that number at the bottom of a spreadsheet.
2. Predict how much you believe you can sell during the coming year and record that number at the top of the spreadsheet. (Be sure to read my sales forecast warning below.)
3. Estimate how much you plan to spend in 2012. The approach I recommend for this part of the profit plan is to refer to expense portion of your most current income statement, record each of the expense categories from it and do your best to determine how much you will spend in each of these expense categories in 2012. If you’re like most of the businesses I work with, people-related expenses will make up the majority of your operating expenses, so it is critical that you follow a proven formula for estimating people-related expenses (salaries, workers’ comp, group medical and payroll taxes).
Planning People-Related Expenses
In the first column of a 12-month spreadsheet, record the name of each current employee. In the second column, record how much each existing employee currently earns and in the third column, record how much you plan to pay each employee in 2012 by recording the new level of pay in the month you plan to make the pay adjustment.
Be sure to consider any new hires you plan for 2012. If, as an example, you plan to hire a new administrative person in May 2012, insert X – Admin at the bottom of your list of employees and insert his or her estimated monthly income beginning in May.
Now, you know how much you plan to earn. You know how much you plan to sell and how much you plan to spend. There’s only one number missing – gross margin. So back into this number; in other words, how much gross margin do you have to earn in 2012 to make your plan come true?
Warning
When I first became a GM, I made a huge mistake in planning my company’s sales. I arrived at my company’s sales plan myself and then assigned a sales goal to each of our salespeople. That formula didn’t work because the sales plan did not belong to the salespeople, it belonged to me. I later learned a far more effective way to estimate sales. I believe you will agree that there are only two ways to grow sales – sell more to existing customers and bring in new business from new customers.
Here’s how I changed the sales forecasting process:
- I asked each salesperson to list each of their existing customers and record how much each customer purchased from our company during the current year.
- Next, I asked the salespeople to record each of the product categories we sold and which of these product categories their current customers did not buy from us and to do their best to predict how much new business we could sell to each existing customer.
- In the final step, I asked them to list each of their primary prospects and estimate how they believed they could sell each prospective customer during the coming year.
Profit planning is a process. Follow the process and dramatically increase your odds of achieving your company’s earning goal for 2012.