Almost no service business owners work with an annual budget. But a budget for your business isn’t just a spreadsheet with some numbers on it, it’s the Profit Plan for your entire business, and when used right it can help you make better decisions and be more profitable over time.
The first step to establishing your Profit Plan is to understand your true costs of doing business. We went over exactly how to do that in the last blog post so I definitely suggest you check that one out (click here).
Here’s a quick overview.
You need to identify your fixed operating costs, such as rent, utilities, insurance, telephone, internet, etc. so you have an amount for your monthly fixed costs. Then, you need to understand your job material costs and payroll costs for your technicians.
You want to get as complete a picture of your expenses as possible. Once you understand those numbers you can determine your profit margin on each job and make sure that your overhead costs are covered every time you or one of your employees goes out on the road.
Once you’ve got those in place it’s time to start working on your Profit Plan.
You will need a Profit and Loss report or Income Statement for the year, preferably printed out by month. This information will allow you to see the income that has come in each month and the expenses that went out.
You’ll also be able to see certain fluctuations that happen over the course of the year.
For example, if you pay your liability insurance once a year and are on the cash basis of accounting, you’ll have a large expense in one month and not in the others.
It’s also a good idea to add an area to track your loan payments and other liabilities, since those factor into your total overhead expenses.
The point of putting all this info together is that your Profit Plan becomes a tool to compare the performance of your business against. You will know at a glance if you are hitting your revenue goals at any given time and if you should adjust your strategy.
Once you have your baseline numbers, you can use those to forecast over the following year and build your business goals into the plan.
Do you want to increase sales in your slower months? Do you want to reduce costs in your slower months? Your Profit Plan can reflect these types of goals, but be sure to be realistic with the numbers or they can become meaningless!
Having a Profit Plan improves the performance of the entire company and it makes decisions easier at the same time. You can compare actual income and expenses to budgeted income and expenses for a particular time period, and immediately see if your service business is ahead of the game or falling behind.
Once you’ve determined your revenue goal for the year via your Profit Plan, you can use that number to break down exactly how many sales you need to make to achieve your goal.
If you know you would like to hit $5 million in sales this year and your average order is $1,000, then you need 5,000 sales this year.
If you have multiple products or service lines then you will need to adjust the number of sales by the various product and service lines.
Once you have your revenue targets in place you can set up marketing plans and production plans to make it into a reality.
From there you need to start tracking Key Performance Indicators (KPIs). When it comes to KPIs there are plenty of options in what to track including:
- Number of new customers this week/month/year or compared to a prior period
- Number of repeat customers this week/month/year or compared to a prior period
- Average sale amount this week/month/year or compared to a prior period
- Lead conversion from various marketing sources
- Performance of various marketing strategies
- Actual costs per job this period vs last period
- Number of Google (or other sources) reviews this period vs last period
- Number of referrals this period vs last period
- Employee labor costs as a % of sales
There is no single list of KPIs that every business should be tracking all the time. What matters to your business will change. The goal is to track the numbers of the right metrics so that you can make better decisions about how money is spent in your business.
“What gets measured gets improved.”
If you aren’t measuring your performance, how can you expect it to get better?
Keep in mind – small improvements to your sales goals and to your expenses can yield dramatic results. If you want some help putting your Profit Plan together, click below to schedule a consultation call with us!
