OK, I’m going to create a plan… where do I start?
Planning is a prediction of what’s going to happen in the future. Based on those predictions, managers make proactive decisions on what to do and how much to invest to make the predictions come true.
You don’t have to be a fortune-teller to be good at it.
The first planning step is to quantify what’s happened in the past. For an integration company, we need to know:
1) How much revenue the company has generated during each of the previous 12 months or, even better, 24 months.
2) What has the Gross Profit been on those revenues? For simplicity, total up only the costs of the goods sold each of those months. No freight or other expenses are needed to make this a useful calculation.
3) How much has the company had to pay people each of those months? After COGS, compensation is the single-largest company spend. It includes the gross wages paid to all employees (including the owner), the associated payroll taxes and benefits, and any monies paid to subcontractors for work that is billed to clients.
4) What was the net profit each month?
Line the numbers out on a spreadsheet. Calculate Gross Profit as a percentage of sales to determine GM. Divide GP by the compensation total to see what percentage of GP has been used to pay people. Divide net profit by total revenues to calculate the operating margin.
You now have the 4 most important numbers you need to predict future revenue growth and profitability. A simple yet powerful history lesson.
Next time, we’ll walk you through turning history into a plan.
Steve Firszt and Paul Starkey have formed the quintessential business metrics firm in VITAL Management. Their quantitative model along with group comparatives and personalized coaching form a unique professional service for the custom electronics industry. Working exclusively with companies of $2M in sales or more, VITAL Management is helping good companies become great.