The start of April was the start of the new year for many companies including ours, and it’s the perfect time to make sure you’ve got your financial plan ready for the year.
As the economy grows again, it’s vitally important we rebuild the strength of our businesses so we have enough cash to safely fund that growth. And that means making a proper level of net profit after tax and dividends. You want to be aiming for at least 5% net after tax and dividends, and ideally heading towards 10%. Retained profits give you cash, resilience and choices, and help to keep your business safe.
So when you’re looking at this years’ budget beware the trap of basing it on last year and adding a few percent to sales and wages costs. It’s a sure fire way of getting a stale business and a distinctly less than impressive level of profit. It also makes it harder to plan your personal finances.
Instead follow these rules to create more profit this year, more cash and a financially stronger business:
- Firstly, decide how much profit you want to make this year and work backwards. Most businesses will start with a sales forecast, take off cost of sales, less their overheads and see how much is left at the end.WRONG!You need to decide how much profit your business should be making and then work out what your sales need to be to achieve it.
- Prepare your budget from scratch, rather than tweaking last years. This will get you to look at the business afresh each year.( We accountants call this Zero Based Budgeting)
- Review your customers – do they all still fit with your strategy, do they all make your target gross margin?
- Look at your products and services – are they all profitable enough, do you need to stop doing anything?
- Really look at your overheads, in detail. Ask to see a nominal activity report for all your overheads for the last year. I bet there will be costs there that you didn’t know you still had.
- Rather than costs being just what they are, you need to decide how much costs can be for you to hit your profit target.
- Allow for 20% corporation tax on your budgeted net profit, and then take off your dividends to arrive at a net profit after tax and dividends. You need to show this as a percentage of sales as well so you know if your retained profit is high enough.
Now hopefully you’ve a three to five year plan in place, particularly if you’re on or have been on Growth Accelerator, so you’ll already know what strategy you’re following this year. So now is the ideal time to flesh out the details – what people, equipment or machinery are needed, what do you need to invest in sales and marketing to hit your sales targets?
Not your year end?
And even if it’s not the start of your financial year, now is always a good time to review your financial plan for the year and make sure you’re forecasting a profit figure that you’re going to be really happy with.
So not the same old same old
My coach Stuart Ross is always asking me what I need to stop doing to get the business where we want it to be. And the new financial year is such a good time to reflect on customers, products, services and habits. We need to do something different if we want a different result.