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PocketWatch On February - 20 - 2011

http://planetpov.com/?attachment_id=20577

This is the eighth in a series of articles that will hopefully educate readers and illuminate the process of doing business in a simple to understand, nuts-and-bolts way.

To read all the articles in this series, click on any of the following:

In the last article, we established a method to predict sales and established a concept of how to look at Cost of Goods Sold (COGS) as a percentage of sales.  Now let’s expand on that a bit to get to a useful Financial Plan.  As you recall, our sales history looked like this:

Now, in going back over your records looking at COGS information, you can fill in another line listing COGS expenses by month in the same way.  This isn’t rocket science, but slogging, hard work. 

Now, go back and do the same thing for your General & Administrative (G&A) Expenses for the same periods that you have done for Sales and COGS.

Normalizing G&A

If you have properly separated out your COGS expenses, the G&A expenses should be fairly stable month-to-month.  Rent stays the same, insurance, mailing, office supplies, phone bills, etc., all average out to be pretty much the same every month.  It’s that average we want to consider.  Find out what that average is per month and make a note of it.

You are now ready to do a few simple calculations, so haul out your calculator.  Here are the formulae:

Perform this operation on each month you have data for, and for the yearly totals.  It should look something like this:

There is a ton of information here.  What you have just accomplished is a historically accurate and rational picture of how your business operates month by month, quarter by quarter, and for the year.  There’s lots to think about as well.  You can see in the model above that the last two fiscal quarters of the year carry the first 6 months.  You can see that you will likely have cash flow problems to overcome.  And you can also see that you can expect to have a tidy 10% Net Profit at the end of it if you operate according to historical norms.

Many bad business decisions are made because of panic over not understanding how a business operates from this perspective.  If you are sitting in March with a HUGE negative Net Margin, it is easy to think you are in trouble.  If you, instead, KNOW that this is how your business ordinarily cycles, and you are on track according to this map, there is literally nothing to be concerned about.

By the way, you have just created a Financial Plan, or at least the base of one.  If you take this map of how your business operates, and plan to, say increase Sales by 5% in the next fiscal year, take all this information and do the following:

  • Increase each month’s sales numbers by 5%
  • Maintain the overall COGS percentage in each month
  • Maintain the G&A actual dollars
  • Observe what happens to the Net Profit dollars and Net Profit Margin

Or, you may have a plan to decrease COGS by 2% in the next fiscal year as well.  Plug in the proper numbers and see how that affects your bottom line.

THIS IS A VERY VALUABLE PLANNING TECHNIQUE!  You must master it in order to understand how all the moving parts of your business interact!  And, by the way, whatever you decide to do with your business in this regard, once you have made a plan for the coming fiscal year, a summary of that plan, with real numbers that mean something and are based in reality, belong in…. The Business Plan.

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Please contact me offline at microconsulting@aol.com with anycomments, suggestions or ideas for future articles that you may not want to share here.

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Written by PocketWatch

I am a small town boy from northern Wisconsin, who grew up in the quintessential American family. Dad was a carpenter, mom stayed home, two brothers and a sister. Our politics, and we were political, was always Democrat. My dad always said all you had to do was to look at what each side was fighting for, and it was easy to see, even as a kid, that Republicans were all about big money and rich businessmen, whereas the Democrats were more about social solutions. I spent 6 years in the US Army in the VietNam era as an electronic instructor for NSA, worked as a Field Engineer for a computer firm based in Massachusetts, spent another few years building paper mills around the world for a firm from Washington state, drove long haul truck for a while, did 10 years of servitude in NYC for a large multinational market research company as the Business Manager, spent some more time on the road as a Business Consultant, and the last bit as the Business Manager for a manufacturing firm here north of Houston. I am trying to start up my own consulting firm using all my experience to help small and medium sized businesses stay out of trouble versus waiting until they get into trouble. No one teaches people how to properly run a business. Business schools and MBA programs really don't. There are very basic nuts and bolts that are either assumed or are ignored, and like the house built on sand, businessmen and entrepreneurs ignore these solid foundations at their peril. (Now retired and doing some substitute teaching at a couple of small K-12 schools here in northern Wisconsin. Living in a small hamlet of 340 people, quiet, peaceful, serene.)

11 Responses so far.

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  1. KB723 says:

    PW, Holy Makerel. That’s a lot of info. Thanks for sharing. 😎

    • PocketWatch says:

      KB,
      It’s a lttle hard work up front, but will save a thousand headaches down the road.

      The right way is not easy to set up, but is well worth it!

      • KB723 says:

        PW, It was on the Wisconsin page toward the bottom.

        • PocketWatch says:

          KB, saw it, no sweat.

          • KB723 says:

            PW, That is my lifesaver. I work alone all day everyday. I have my Ipod on mostly all day long. If ever I am called to the front office, usually to help a sales rep with a potential client, I am txted on my cell. They know I am paying No attention to anyone, the also know the more bent I am, the Louder the headphones. It’s getting late, so I think I may email you to the listed address above tomorrow at lunchtime.

            • KB723 says:

              snoskier, I will be sure to take you up on that. I have created something very new to the world of graphic arts. Perhaps we can share emails soon and I can show you what I have been up to… Take Care sno, I am off to bed.

            • snoskier says:

              KB. I too, am a businessman, with 40 years experience in management. Anytime you want to ask questions of me as well, please don’t hesitate to do so.

            • PocketWatch says:

              No problem.

          • KB723 says:

            PW, this has been the longest 5 years of my life. I hate it!!! Even worse, my girlfriend works there as well. She is treated like shit and all I can do is try to help her keep it all together. I am unbreakable and can look past to discretions but when my GF comes to my room crying, it sure is not easy.

            I really need to clue you in on what I have been doing lately, I think it might share some light. I am NOT a people person, so I have left all sales up to her (GF). She can start conversation with just about anyone as to I am more the type to tell folks to go to Hell. She needs to Hone her skills at dealing with folks and really needs to gain her self confidence in sales. I think sometimes that sharing conversation here with folks is helping in my abhorant feelings toward people. But maybe just on the top layer.

            Sheesh I am Ranting again.

            • PocketWatch says:

              KB -- rant away. I dislike people most of the time myself. I have been accused of the sin of being blunt as well. Vent. It’s ok.

              I worked for a woman in NYC for 10 years that was really and actually certifiable. When she went off her meds, she was literally crazy. She threatened to kill me more than once (one time over party planning, of all things!).

              I can feel your pain. I learned to just ignore her and all the business dimwits. I worked behind the scenes and in the shadows, leaving no fingerprints or paper trail. I made it fun for me.

      • KB723 says:

        PW I replied to another one of your comments on another page. I need to find it and share, but honestly I was getting angry just replying.


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