Your guide to developing a business profit plan

This blog has covered many elements of a good profit plan in the past, but no post has covered the entire process.  

That’s because a good profit plan takes time to explain, and this blog tries to keep things quick for you. 

Today, we are going to walk the tightrope between information and time. 

This post will try to provide a roadmap to business profitability without chewing up your whole day.  It will cover revenue targets, cost management, pricing strategy, and break-even analysis to help you improve financial viability. 

Ready?  Let’s go! 

Assess the Market and Set Revenue Targets 

Too many business owners forget about good market research. They end up providing consumers with what they think is needed. 

That doesn’t always align with consumer desires, and the results can be disastrous. Those who remember the New Coke debacle can attest to that fact. 

So, before anything else, know the customer’s needs inside and out. 

You also want to understand the competition, so spend some time analyzing their pricing and products. That will give you some insight into what customers want, too. 

Understanding industry trends and economic factors is also critical. Having this information helps you set realistic revenue goals and emphasize potential profit centers in a business. 

Get a Pricing Strategy

Last week’s post, What you need to know about price hikes and tax strategy,  discussed raising prices, but you’ll need a strategy before you can do that. 

The good news is this is pretty simple because there are only three broad approaches: cost-based, competitive, or value-based pricing.  

Cost-based pricing simply involves determining production costs and adding a markup to ensure profitability. This method works well in commodity-based businesses, but most small businesses don’t fall into this category. 

Competing on price can be very dangerous for smaller businesses, especially if your competition is a behemoth national chain with fantastic pricing power. So, definitely talk to your CPA before making the competitive pricing strategy your go-to plan. 

Value-based pricing is a better option for small businesses. If your business can differentiate itself through service, knowledge, features, or benefits, it can afford to charge more, which can help with financial viability. 

Expense Forecasting

Don’t set prices without knowing your expenses. Knowing your financials is critical in choosing the best pricing strategy for your business. 

Be sure to include fixed costs like rent, insurance, and salaries; variable costs like supply costs; and overhead costs like marketing, administrative expenses, and technology. 

Try to identify cost savings opportunities in this analysis. Also, don’t forget to factor in building a contingency fund account for unexpected costs and revenue fluctuations. 

For this, it may be helpful to have a worst-case scenario built into the plan. 

Profit Margin Goals, Cash Flow Projections, and a Break-Even Analysis

After you’ve planned to survive the worst scenario, it’s time to find your break-even point. To do this, divide fixed costs by prices minus the variable cost per unit sold. 

This will allow you to identify how many units of product or how much service needs to be delivered to cover costs. If it takes too long to break even using the current pricing strategy, make some adjustments. 

Now, determine your monthly cash flow using the income and expense projections created earlier. Make sure there’s enough cash to cover operational expenses even before profitability. 

Finally, set profit margin goals for gross profit, operating profit, and net profit. 

Monitor, Monitor, Monitor

Profit plans are not a set-and-forget proposition. You’ll want to measure important Key Performance Indicators and review financial statements at least quarterly. 

Adjust revenue targets, pricing, and expenses as needed and continuously make strategic changes to adapt to new challenges and market trends. 

The Bottom Line

Whether you’re starting a new business or trying to reach profitability on an existing one, profit planning is critical. Keep researching and learning the concepts in this post, and remember that the profit plan is a living document that evolves as your business grows. 

Here’s to a profitable future for your business!