What is there about doing the business plan that we dread? The people who use them swear by them. I’ll bet there might be one or two of you who feel just the opposite.
You wouldn’t think of taking a remodeling job without doing a cost estimate, and the business plan is the cost estimate for the coming year’s business. It is your business plan that is your GA & O budget, and it will need to be monitored just the same as a job in the field, and not by the DB&L method, either — oops, sorry, that’s the Drive By and Look. Just as the field pro checks the schedule to do setup two weeks ahead, the general manager consults the plan for next month or next quarter to be ready for busy or slack time, to make it happen rather than wondering why it didn’t.
The hardest part of the business plan for me used to be projecting sales because we were full service and did it all. We might have a plan to do 18 percent more business next year, but what kind of business — whole house, kitchens, new homes? We found a cool way to forecast new business. If you promise not to tell anybody, I’ll share it with you.
We knew that each one of our project managers should be able to run enough work to generate between $150,000 and $160,000 of gross profit per year (the selling price less the cost of goods sold or COGS), and it didn’t make much difference what kind of business it was — a house or all kitchens. If they did all kitchens, the gross profit per sales dollar would be higher than if we built a big house, where there’s less gross profit per sale dollar but the package is bigger. No big deal, the money’s all the same color. This gave us a surprisingly accurate way to forecast activity without knowing specific job types.
When we get a qualified lead, depending upon the type of job it is, we know how long it will take one of our project managers to do it. If we have five project managers, each one is expected to generate a minimum of $150,000 of gross profit for the year; we are forecasting a year in which we generate $750,000 of total gross profit. Experience tells how many staff and what other costs are attendant to that much business. Run your shop well and you should expect to make a net profit of 7 to 10 percent, so our gross margin should be in the neighborhood of 30 percent. To get the gross sales to support a 30 percent gross margin, divide the gross profit by the gross margin and presto, your gross sales will be $750,000 ÷ 0.30 = $2,500,000, and it doesn’t make any difference whether it’s building kitchens or left handed screwdrivers. It works if you meet the numbers.
Set up your budget monitoring however you like — five project managers each supervise an average $500,000 of jobs per year ($500,000 x 30 percent GM = $150,000 in gross profit). But it doesn’t make any difference whether it’s a new home, a second story add or three kitchens so long as he is producing billings of $500,000 ÷ 12 (months) = $60,000 per month or $12,000 per week. Sure you can weight the monthly forecast to fit your building season but you have a reasonable business plan.
As the CEO, I want to see gross client billings (and payments) of $300,000/mo with a COGS to give me $90,000 of gross profit to be on target; we do twice a month so (non-weighted) I am looking for $150,000 and I want to see a COGS of $105,000. If it’s more or less, I have a clue as to where to look for the “why” in time to plan. This also gives me a big leg up on anticipating capital needs.
From the foregoing, if I want to grow by 15 percent next year, I’ll want to produce an additional $375,000; that’s 75 percent of a project manager. It is hard to buy less than a full one but if I start training at the beginning of the year, by year’s end I should average 75 percent for the year, and I have a 25 percent jump on the next year’s business.
An important element in a business plan that is too often omitted is a bailout or damage control. Expansion plans should be prioritized so damage control can be decided in advance. If there is not enough cash for the skid loader and the new display for the showroom, which do you choose? If biz gets skinny, go with the plan.
Most business software has outlines for BPs. I like to use the SCORE plan outline. This highly recommended program is free and can be found at http://score.org. Remember, the smaller your company the more you need this kind of tool. The time it takes to do an “UGH” will make your life saner, safer, richer and “funner” — while you’re here . . .