Now is the time to get started on financial projections for the coming year, and these are the fail-safe steps that will help you do just that.
Remember the story I told in my last blog, the one about the CEO who doubled his sales as a result of projections? That CEO was focused on revenue streams. That’s where all projections have to start. You must determine what your revenue streams will be, either by service or product line.
Total revenue or total sales over the course of a year don’t just happen. Three ingredients go into generating those revenues. The first is the number of customers your company has. The second is the transaction frequency, or how often your company is expected to do business over the next year with each of those customers. And the third, of course, is the average transaction value. If you had a hundred customers and did business with each 10 times a year, with the average transaction $1,000, you’d have sales for the year of one million.
The other thing to focus upon is the velocity of these sales transactions. Velocity is likely to move up and down over the year, and you’ll have months or seasons where velocity is comparatively higher than at other times. Your company won’t record the same level of sales each month, so give thought to how that will vary.
The next step in the approach is to establish the gross margins of each revenue stream. The gross margin is a very, very important number in your financial statement, and a topic into which we’ll delve more deeply in a future newsletter.
In order to make informed future financial decisions, you must know the gross margin. That’s a combination of looking at the direct costs to produce each revenue stream, and adjusting your sales prices as needed to hit your targets.
Let’s define direct costs, as opposed to overhead costs. A direct cost is any expense related to generating that sale and delivering it to the customer, while overhead costs are not directly related to that sale.
The final step is studying overhead needed to generate revenue streams. Most businesses, I think, let overhead be where it is, realizing it will cost so much to generate those revenues. Some CEOs will take it a step further, saying, “No, let’s allocate a portion of overhead to each of those revenue streams.”
The result of projections is peace of mind for business owners, because they’ve laid out a plan. If you’d like a plan for the year ahead, get in touch with me.
I offer a 100 percent guarantee on my work. I take on only clients I can help. Call me and let’s talk about your business. My phone number is 630-269-7646.
Simply stated, cost containment is all about managing margins. Gross margin and operating margin are the two key drivers in cost containment. Take a look at this $1 million sales company and note the margins:
Just How Important is Cost Containment?
There is not a business anywhere that could not put even a 1% improvement in margin to work. For example, this $1 million company could use a 1%, or $10,000, cost savings to fund a marketing initiative, install new technology, help pay for additional personnel, or make an investment elsewhere. And that’s just 1% and just the first year. Each percent of savings compounds every single year.
Everything happens at the margin. Whether in sports or business, create the differentiation—and you win—every year.
Put This Theory to Work
Create a standing program for ongoing cost containment. Enlist your employees and provide financial incentives for those who identify and implement saving ideas. Just like on the sales side, small economies can add up to big money.