Before you tackle your New Year’s resolution to update your business plan (you did make that vow, right?), it’s critical to review the important points of 2010. You need to detail which goals you reached, which you didn’t, and commit to a rethink of how these affected the business. Do you need to carry them over as 2011 goals, or is it time to shift gears.
Looking at top line revenue is usually the best starting point. If it didn’t grow in 2010, you’re in good company during these uncertain economic times. It isn’t uncommon for a business to go into survival mode until things turn around – the corporate giants do this all the time. Unlike those public owned behemoths, owner managed companies have the ability to simply not be profitable – and don’t necessarily have to dramatically cut costs.
And this is a point that is frequently overlooked or misunderstood by owners – profitability is important if you have shareholders, or if you plan to sell in the next 3 years. If neither of these apply, what you really have to do is run near the red. Cover off fixed expenses, including staff, then load in whatever other expenses you can to stay at or near break-even. Profitability is for bragging rights, but surviving is the best boast.
If you were fortunate enough to grow, then you need to understand what it cost you to manage this. Did you add resources? Increase marketing spend? Pay higher commissions? And were there economies of scale in executing the new business? You should be able to accurately break out the gross margin on the new business (ignore fixed overhead). If you are in a service based business, GM should be at least 25 points. In a product manufacturing business it’s likely closer to 15 points, and retail – well retail margins just suck, it’s strictly a volume play.
The final thing you want to take a close look at is the mix of business – and how it changed from previous years, or expectations. Does this shift signal trends in demand for which you need to adjust? Does it change your selling model (e.g. more/less loss leaders)? And how does this shift affect profitability. See, you knew that you had to understand profit margins, even if you don’t have to achieve them.
When you have a solid grasp on what’s changed, then it’s time to tackle the coming year’s business plan. I’m just working on mine, and will follow up with this in the next blog.
