The Business Edge Blog

August 2, 2010

How to Make a Profit – Part 1

It may sound silly, but many business owners forget that they are in business to make a profit.  That means making money! 

 Most business owners don’t have a plan for how they are going to make a profit this year, this quarter or this month.  I often start learning about my new clients by asking them to describe where their money comes from.  I ask them to look at the different areas of their business and how much money each brings in.  Many have never stopped to look at their business in this way.  We then look at the profitability of each of the areas.  All of this is leading up to developing a Profit Plan for the next 12 months.  The Profit Plan is just what it sounds like: a plan for making profit.  Making a profit is what distinguishes a business from a hobby.

The Profit Plan is the answer to how to make money in your business.  If you can’t plan it out on paper, chances are you won’t be able to do it in real time with your hectic schedule.  What is a Profit Plan?  Bankers and Accountants would call it a Budget or Forecast.  It’s a financial projection of your revenue and expenses for the next 12 months.  Let’s call it a Profit Plan, because once you subtract all of your expenses from your revenue you should have a profit left over.  If not, you need to figure out how to increase your sales or reduce your expenses.

A Profit Plan covers the numbers as well as the underlying assumptions.  For each line item under revenue and expenses, you should have a written assumption that explains how you arrived at that figure.

Developing a Profit Plan provides the following benefits for your organization:

1.  It Pulls Everyone Together: Chances are you as the owner can not put together a full profit plan without input from key people.  You’ll need to have discussions with each one.  It gets all the key players in your organization focused on the future which is the only place you can make a difference.

2.  It Allows For Ownership: Everyone can be assigned responsibility for one or more line of the Profit Plan.  For example, you can proclaim someone as the Utility Czar and her job is to make sure that your actual Utility expenses come in below the projected figure.

3.  It Prevents Monday Morning Quarterbacking: For all of us who are sports challenged, that is the phrase used when people analyze football games the day after and second guess decisions made during the heat of the game.  Usually it is someone on the outside of the organization who plays this role.  If you have all the key people on your team involved in the planning process, they have to each sign off on the plan.  The fact that things are written down prevents them from going back and second guessing how figures were determined.

If you are just getting starting with the concept of developing a Profit Plan, I’ll share with you that the first year is always the hardest because you will be starting from scratch.  Each successive year gets easier because you build on the prior year’s experience.

In the next issue I’ll talk about what to do once your Profit Plan is pulled together, so stay tuned……

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