Planning business growth;
(part 2) Forecasting profitability
In my last blog, I shared the steps on how to review and establish your business fixed costs in planning your cash flow. The next step to planning business growth is to project future income streams and gross margins. This may appear difficult in times of economic and social volatility, but it is possible to encompass such uncertainty into your plans and build in safeguards to increase the likelihood that your business will survive into more stable times.
When working with small business owners, I often hear them say, “I’ll be happy if we do the same as last year.” But that isn’t a plan as such; it’s more an acceptance that there’s nothing they can do to change their business performance and that their business growth is out of their hands. They may as well just open their doors and see what happens!
“I can’t change the direction of the wind, but I can adjust my sails to always reach my destination.” – Jimmy Dean
The key steps to a successful sales plan
Set aside some time (at least half a day initially) in which you and your management and/or sales team can run through some exercises to get a better understanding of the market place, opportunities and potential challenges over the next 12 to 18 months. Agree actions.
2. Assess market forces
Step back and determine which market forces (drivers) are affecting your customers and, possibly, their customers. Are the social demographics within their area of influence changing? Are they growing or shrinking? Are the age profiles of their customers/end users changing?
What affect is developing technology having on your customers and their customers? Do you face stiffer competition due to cheaper manufacturing, automated delivery processes or are traditional buying habits changing through utilisation and access to online information and social media?
Consider trends caused by economic fluctuations and the effect of currency exchange rates. Are these having a positive or negative effect on your own customers buying habits? BREXIT is certainly causing uncertainty and delays to big ticket item purchases.
Finally, ensure you consider any political factors and their effects on the market place. From the ever increasing turmoil, political unrest or terrorist threats across the globe to new legislation which can close or create opportunities in markets. Remember how UK solar panel (PV) suppliers and installers had a huge drop-off in business when feed-in tariffs legislation changed in December 2015? If the five new UK Clean Air city zones proposed become a reality, there will be many opportunities for those operating in diesel exhaust pollutants reduction technology, electric transport solutions and associated infrastructure and watch bicycle sales increase drastically in these five cities before 2020.
3. Consider your customers
The next step is to look at your current customer base. Which sectors of industry or demographics are they operating in? Based on the S.T.E.P. analysis above (2.), which of these companies and sectors are likely to be the future winners and who could be the losers? If you don’t know, don’t assume, go find out from your customers. What are their challenges and expectations for the future? An extended exercise of this phase is to highlight prospective customers in those sectors which you believe will prosper over the next few years (this becomes your hit list!).
4. Know where your profits lie
Review your current product/service sales split against total sales revenue. Then determine which revenue stream delivers the highest gross margins and which just cover costs. Understand why there are differences. Are some services delivered by in-house labour rather than outsourced or are the increases in purchase prices of material not being passed on to your customers? Highlight the products or services which generate a higher margin, as you need to promote and sell more of these. For the remainder, either review your prices or don’t promote them unless they are a strategic loss leader to obtain bigger opportunities.
5. Promote your low-hanging fruit
Focus on the areas in which to increase sales over the short-term. For each existing customer, highlight what products or services they buy from you and, importantly, what they don’t buy. Ask yourself if you’re getting your ‘share of their wallet’ or are there further products you could sell to them? What are your customers buying elsewhere that you could supply? Again, don’t assume; contact and revisit all your top customers, not to sell, but to raise awareness of the products and services that you offer and to find out why they don’t buy these from you.
These are low hanging fruit and, chances are, your customers don’t know you even offer them. If you carry out this process effectively, I wouldn’t be a surprised if you increased sales revenues over the next 18 months by 18-20% and be more profitability too.
6. Aim and fire
Select five or six target customers from your hit list (3.) and draw up a plan to visit and market to these businesses over the next 12 months.
7. Forecast your sales
Start plotting numbers and setting targets for each trading month ahead. I suggest you start with a blank sheet of paper and set a realistic but stretched sales target for each month based on each product or serviced offered and create separate invoice codes so you can measure and track.
Based on your gap analysis (5.), if customer A, only bought 50 of product X and five of service Y in 2017, what could they potential buy in 2018? And what other products and services could they buy throughout the next 12 months? Do this for each key customer and ensure that whilst you plot the sales revenue, you also tally the cost of sale for each month based on step 4. Even if you only reviewed 80% of your existing customers I am sure your sales prediction will be higher than your current year. Don’t forget about seasonality and don’t be over ambitious with obtaining new business from new customers. Ideally, you want a mid-range forecast rather than being too optimistic or reserved.
“The odds of hitting your target go up dramatically when you aim at it.”
You may have to go over this exercise a few times and it’s worth sharing the plan with your team before you agree any actions.
Importantly, consider how an increase in sales will affect fixed costs and the capacity to deal with greater volumes. Do you need to spend more on marketing, staff and wages, warehousing, equipment, machinery or plant? If so, allow for these in your forecast.
You should now have a forecast, budget, sales targets and a plan on paper. Next week, I’ll share my views and experience on how to successfully implement a sales plan.
“Unless commitment is made, there are only promises and hopes; but no plans.” – Peter F. Drucker
Want to learn more?
If you are looking to grow your business, Business Doctors Cumbria offer a free business health check where we can help you to set a clear vision to understand the key steps you need to take to fulfil your aspirations.
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