Analyzing Current Sales and Gross Profit

Analyzing Current Sales and Gross Profit

Your sales and gross profit forecast begins with analysis of current performance. Sales are usually divided into various categories. Each category is examined individually to determine expected sales for the coming year. Time spent Analyzing Current Sales and Gross Profit will help you manage your business and allow you to be proactive in changes to your business model.

 

Selecting Sales Categories

The selection of categories will depend upon the nature of your business. For example, a food broker selling to a large number of relatively small accounts might be interested primarily in analyzing sales by product. The owner of a single retail store might choose to analyze sales by selling department, while the owner of a retail chain would probably be interested in analyzing sales by outlet. An insurance broker with several agents might categorize sales by agent. An individual wholesaler might consider sales by sales territory.

 

Factors Affecting Sales

After categories have been selected and current sales divided among them, the various factors that can affect sales in each category must be considered. These factors could be either internal or external. Internal factors are those that you can influence. External factors are those that affect the market served by your business, but are generally beyond your control.

 Internal Factors

The following are typical internal factors that could influence your sales forecast:

  • Promotional plans
  • Expansion plans
  • Capacity restrictions
  • New product introductions
  • Product cancellations
  • Sales force changes
  • Pricing policy
  • Profit expectations
  • Market expansion to new customers or territories

 External Factors

Among the external factors that must be considered are the following:

  •  Business trends
  • Government policies
  • Inflation
  • Changes in population characteristics
  • Economic fortunes of customers
  • Changes in buying habits
  • Competitive pressures

Sales Forecasting and the Business Plan

Sales Forecasting and the Business Plan

Summarize the data after it has been reviewed and revised, for your goal is to integrate sales forecasting and the business plan. The summary will form a part of your business plan. The sales forecast for the first year should be monthly, while the forecast for the next two years could be expressed as a quarterly figure. Get a second opinion. Have the forecast checked by someone else familiar with your line of business. Show them the factors you have considered and explain why you think the figures are realistic.

 Your skills at forecasting will improve with experience particularly if you treat it as a “live” forecast. Review your forecast monthly, insert your actuals, and revise the forecast if you see any significant discrepancy that cannot be explained in terms of a one-time only situation. In this manner, your forecasting technique will rapidly improve and your forecast will become increasingly accurate.

 Forecasting Sales and Gross Profits

 Development of your profit plan should usually begin with a forecast of your expected sales and gross profit for the coming year.

 The sales and gross profit must be considered together since they are so closely interrelated. Gross profit percentages are determined by pricing policy, which also affects expected sales volume. A decision to increase the expected gross profit percentage will usually tend to decrease expected sales, while reducing the expected gross profit percentage should increase sales.

 A second major reason for beginning the profit plan with a sales forecast is that the volume of expected sales often determines a number of other factors such as the following:

 Expected changes in variable expenses, those expenses that tend to change in direct proportion to changes in sales.  These could include expenses such as sales commissions or delivery costs.

The impact of the added sales volume on the various fixed costs of operating your business. These costs, by definition, do not tend to vary in direct proportion to changes in sales volume. However, substantial increases in sales over an extended period can force an increase in many fixed expenses. For example, a sales increase realized through the addition of many new accounts could affect bookkeeping and credit costs.

The ability of present resources such as storage space, display area, delivery capability, or supervisory personnel to accommodate the added volume.

The need for funds to invest in increased inventory or accounts receivable to accommodate sales increases.

Cash generated from operations to meet current operating needs as well as expansion requirements, debt repayments, and owners’ compensation.

 Realism

A realistic sales forecast must rely on careful analysis of market potential and the ability of your business to capture its share of this potential. The forecast should not be based upon “what you would like to do” or “what you hope to do.” It must be “what you can do” and “what you will do.”

Forecasting Sales

Forecasting Sales

 Sales forecasting is the process of organizing and analyzing information in a way that makes it possible to estimate what your sales will be. Forecasting sales is an ongoing process.

 If you sell more than one type of product or service, prepare a separate sales forecast for each service or product group.

 There are many sources of information to assist with your sales forecast. Some key sources are:

  •  Competitors
  • Neighboring Businesses
  • Trade suppliers
  • Downtown business associations
  • Trade associations
  • Trade publications
  • Trade directories

Spending the time searching the internet, especially the resources available online at many libraries is the best way to do market research on all of the topics listed in this post.

 

Sales Forecasting for a New Business

 These steps for developing a sales forecast can be applied to most kinds of businesses:

 Step 1:

 Develop a customer profile and determine the trends in your industry. Use the libraries online references (newspapers, magazines, articles, and industry statistics) to do this.

Make some basic assumptions about the customers in your target market. Experienced business people will tell you that a good rule of thumb is that 20% of your customer’s account for 80% of your sales. If you can identify this 20% you can begin to develop a profile of your principal markets.

 Sample customer profiles:

  •  male, ages 20-34, professional, middle income, fitness conscious.
  • Young families, parents 25 to 39, middle income, home owners
  • Small to medium sized magazine and book publishers with sales from $500,000 to $2,000,000

 Determine trends by talking to trade suppliers about what is selling well and what is not. Check out recent copies of your industry’s trade magazines. Search the Business Periodicals Index (found in most libraries online) for articles related to your type of business.

 Step 2:

 Establish the approximate size and location of your planned trading area.

Use available statistics to determine the general characteristics of this area.

 Use local sources to determine unique characteristics about your trading area.

 How far will your average customer travel to buy from your shop? Where do you intend to distribute or promote your product? This is your trading area.

 Estiating the number of individuals or households can be done with little difficulty using statistics census data which can be found online.. Statistics family expenditure survey can identify what the average household spends on goods and services. Information on planned construction is available from a variety of sources. By using standard industry codes you can search online resources to see how many direct competitors you have in your area. 

Neighborhood business owners, the local Chamber of Commerce, the Government Agent and the community newspaper are some sources that can give you insight into unique characteristics of your area. While online resources are important, don’t forget to use “local people” resources.

 

Step 3

 List and profile competitors selling in your trading area.

Get out on the street and study your competitors. Visit their stores or the locations where their product is offered. Analyze the location, customer volumes, traffic patterns, hours of operation, busy periods, prices, quality of their goods and services, product lines carried, promotional techniques, positioning, product catalogues and other handouts. If feasible, talk to customers and sales staff.

 Step 4

 Use your research to estimate your sales on a monthly basis for your first year.

The basis for your sales forecast can be the average monthly sales of a similar-sized competitor’s operations who is operating in a similar market It is recommended that you make adjustments for this years predicted trend for the industry. Be sure to reduce your figures by a start-up year factor of about 50% a month for the start-up months.

 Consider how well your competition satisfies the needs of potential customers in your trading area. Determine how you fit in to this picture and what niche you plan to fill. Will you offer a better location, convenience, a better price, later hours, better quality, better service?

 Consider population and economic growth in your trading area.

 Using your research, make an educated guess at your market share. If possible, express this as the number of customers you can hope to attract. You may want to keep it conservative and reduce your figure by approximately 15%.

 Prepare sales estimates month by month. Be sure to assess how seasonal your business is and consider your start up months.

 Sales Forecasting for an Existing Business

Sales revenues from the same month in the previous year make a good base for predicting sales for that month in the succeeding year. For example, if the trend forecasters in the economy and the industry predict a general growth of 4% for the next year, it will be entirely acceptable for you to show each months projected sales at 4% higher than your actual sales the previous year.

 Credible forecasts can come from those who have the actual customer contact. Get the salespersons most closely associated with a particular product line, service, market or territory to give their best estimates. Experience has proven the grass roots forecasts can be surprisingly accurate.

Price

Price

There are a number of pricing strategies you can use to achieve your growth goal. Each price strategy has the potential of producing a profit, and most are tied to the critical relationship of price-to-sales volume and stock turnover. Some strategies you may want to consider are listed below.

 

Price Skimming

This refers to the practice of charging high prices for the purpose of maximizing profit in the short run. It works best when:

 

The product is unique and people are willing to pay extra just to have it. There are trendsetters in society who always are looking for something new and are willing to pay the price. A larger number are followers, and they will buy your product if the leaders accept it. The followers, however, will not pay the higher price.

 

The cost of development is high and there is a chance of early obsolescence or imitation by competitors.

 

You have a strong patent position, or your product would be difficult to copy.

 

The real disadvantage of skimming is that it attracts competition. Your competitors will soon figure out what you are up to, and the high profit potential will encourage them to copy you. They may produce cheaper versions of your product or style, referred to as knockoffs in the market. Once you have meaningful competition on price, your skimming days are over and you run the risk of ending up with a warehouse full of products that cannot be sold at any price.

 

Penetration Pricing

The opposite of skimming is to introduce your product at such a low price that you will quickly gain a large share of the market. The purpose is to discourage competition. However, eventually you will have to raise your prices to start making some profit and, when you do, you will learn much about customer loyalty.

 

Buying a Market Position

A variation of penetration pricing is to buy your way into the market with free samples or heavy coupons, for example, 50 cents off on a 69-cent purchase. Big companies usually use this tactic because it takes considerable financial backing and it may be six months or more before it starts to pay off. Small marketers can use it to the degree they know what they are doing and can control the process. Frequent follow-up is important to ensure samples are not going to professional collectors but are reaching potentially strong customers.

 

Loss Leader

This refers to promoting a few items at a sizable reduction to attract customers. The idea is that the increased traffic will result in greater sales of your regular-priced merchandise. The reductions have to be on recognized brands and items purchased frequently enough so customers know the prices and can recognize the savings. You must keep switching leader items – people are not going to buy catsup four weeks in a row regardless of its price. The danger is that you may develop a following of cherry pickers who will breeze into your store, scoop up the specials and buy nothing else.

 

Multiple Unit Pricing

You can increase the size of your individual sales by offering a meaningful discount for larger purchases. A liquor store usually will offer a discount or throw in a free bottle of wine when you buy a case. The same idea applies to the “baker’s dozen,” a discount on a “set” of tires or selling beer and soft drinks by the pitcher. This is a good technique for building customer goodwill, but you will not see your customers as often. The trade-off, of course, is that you save time and money on containers and packaging, save time by writing up fewer sales and, perhaps, can make your delivery service more efficient by selling by the truckload. Variations are “two-fors,” “six-packs,” “cheaper by the carton” and “bulk price.”

 

Suggested Retail Pricing

This is the practice of selling at prices set by your suppliers. It is convenient because many product lines are available prepackaged and pre-priced. However, you lose flexibility and must live with a set percentage markup. (To combat this disadvantage, some suppliers offer “two-for-three” options using the retail price). Because suggested-retail or retail-price-maintenance plans are illegal in some states, the practice usually is a loser. Using a slightly different strategy, Panasonic published a “minimum retail” price list showing a higher “average retail”; some stores use such gimmicks as “compare at” or “nationally advertised at” to imply that the “official” price is at a certain point.

 

Discount Pricing

The discount store usually offers lower prices as a trade-off for Spartan interiors, lack of sales help and the efficiency of central checkouts. These stores typically work on a 35 to 38 percent markup compared to 42.5 to 45 percent for a department store. Since discount stores depend on the efficiency of greater volume to cover operating costs, they must maintain, or at least promote, good prices.

 

Full-cost Pricing

This pricing is calculated by adding the costs of the product or service plus a flat fee or percentage as the margin of profit. During inflation, you must keep track of your costs to make sure that you are charging enough. In many business lines, owners have come to realize that when they replace their stock, the wholesale price has often risen above their retail price. If they do not raise prices rapidly enough, they are faced with diminishing inventories at a constant dollar investment or with having to invest more money to restock their shelves at the constant level.

 

Keystone Pricing

This refers to the practice of setting the retail price at double the cost figure, or a 100 percent markup. It is most common with jewelry items and in specialty shops, high-ticket fashion shops and department stores. Typically, the merchandise is subject to drastic clearance markdowns on items that are slow sellers or held past the season.

 

Price Lining

This is the technique used by most retail stores of stocking merchandise in several different price ranges. A hardware store, for example, may carry hammers in good, better, and best categories at $6.49, $12.49 and $19.98, respectively, and a professional model at $27.95. The theory is that people buy products with different uses in mind and with different expectations for quality and length of useful life. If you do not carry a range of prices, you may lose the customers who cannot find the product at the right price. Price lining simplifies buying and inventory control because you buy only for the price levels that you know your customers will accept and eliminate those goods that fall outside the levels you want to carry.

 

Competitive Advantage

Here is where you copy or follow the prices set by your competition. Based on your service image, you can set your prices equal to, above or below those of your competition. This strategy requires constant vigilance by reading the ads and shopping your competition. It is a more passive technique because you’re always following your competitors. Chances are your more aggressive competitor can make better purchases than you. A variation of this is the we-won’t-be-undersold routine, where you offer to meet or beat the prices of all your competitors.

 

Pre-season Pricing

Many manufacturers offer price discounts or dated billing as incentives to buy early. This is important to manufacturers because of production planning and the lead time necessary for ordering raw materials. For the retailer, the same principles apply; also, off-season specials may be a way to profit in business on a year-round basis. When you sell at a lower price to get the early sales, you may be borrowing from later full price sales. On the other hand, anyone who has tried to buy snow tires during the year’s first snowstorm knows the extent of delivery problems. In this case, early sales at a lower price would have allowed the merchant to serve the customers better and to capture sales that may be lost due to limited service facilities.

 

Price Is No Object

This refers to certain marketing situations in which the quality of the product or service is far more important than the price. If you need a kidney transplant, for example, you are not going to shop around and haggle over price. And even if you do press the doctor, he probably will quote you a range with a $5,000 spread rather than giving a specific number. The same is often true with high ticket fashions and jewelry. Using the same psychology, expensive automobiles and boats are not sold on price. They may use a starting at or base price to get people interested, but the prices of the options are usually in very small print. The extreme of this attitude is that if you have to ask the price you probably cannot afford the item anyway.

Concerning Personnel Management

Concerning Personnel Management

Here are a few suggestions concerning personnel management:

 1. Periodically review each position in your company. Take a quarterly look at the job. Is work being duplicated? Is it structured so that it encourages the employee to become involved? Can the tasks be given to another employee or employees and a position eliminated? Can a part-time person fill the job.

 2. Play a little private mental game. Imagine that you must get rid of one employee, If you had to let one person go, who would it be? How would you realign the jobs to make out? You may find a real solution to the imaginary problem is possible to your financial benefit.

 3. Use compensation as a tool rather than viewing it as a necessary evil. Reward quality work. Investigate the possibility of using raises and bonuses as incentives for higher productivity. For example, can you schedule bonuses as morale boosters during seasonal slacks or other dull periods?

 4. Remember that there are new ways of controlling absenteeism through incentive compensation plans. For example, the owner-manager of one small company eliminated vacations and sick leave. Instead, this owner-manager gave each employee thirty days annual leave to use as the employee saw fit. At the end of the year, the employees were paid at regular rates for the leave they didn’t use. To qualify for the year-end pay, the employee had to prove that sick leave was taken only for that purpose. Non-sick leave had to be applied for in advance. As a result, unscheduled absences and overtime pay were reduced significantly. In addition, employees were happier and more productive than they were under the old system.

An Advantage Over Big Business

 An advantage over big business

In working to achieve results, the small business owner-manager has an advantage over big business.

 You can be fast and flexible while many large firms must await committee action before a decision is made. You do not have to get permission to act. And equally important, bottlenecks to implementing new practices can receive your personal attention.

 One of the secrets is in deciding what items to control. Even in a small company, the  owner-manager should not try to be all things to everyone. You should keep close control on people, products, money, and any other resources that you consider significant to keeping your operation pointed toward profit.

 Manage Your People. Most businesses find that their largest expense is labor. Yet because of the close contact with employees, some owner-manager of small businesses do not pay enough attention to direct and indirect labor costs. They tend to think of these costs in terms of individuals rather than relate them to profit in terms of dollars and cents.

Control Your Business

Control Your Business

To be effective, the owner-manager must be able to motivate key people to get the results planned for within the cost and time limits allowed. Only you can control your business.

Predict Your Future

Don’t use a crystal ball to make forecasts of your business. By carefully analyzing the historic trends of your business, as shown in your records for the past five years, you can forecast for the year ahead. Your record of sales, your experience with the markets in which you sell and your general knowledge of the economy should enable you to forecast a sales figure for the next year.

 When you have a sales forecast figure, make up a budget showing your costs as a percentage of that figure. In the next year, you can compare actual P&L figures to your budgeted figures. Thus, your budget is an important tool for determining the health of your business.

 

Make Timely Decisions

Without action, forecasts and decisions about the future are not worth the paper they are written on. A decision that does not result in action is a poor one. The pace of business demands timely as well as informed decision making. If the owner-manager is to stay ahead of competition, you must move to control your destiny.

 Effective decision making in the small business requires several things.

 The owner-manager must have as much accurate information as possible.

  • With these facts, you should determine the consequences of all feasible courses of action and the time requirements.
  • When you have made the judgment, you have set up your business so that the decisions you make can be transmitted into action.