Planning for profit

By Douglas Freer, CSP

Planning for profit in the snow business is challenging, and often it feels like a roll of the dice as to whether we’ll actually earn any profit in a given year. Often, we’re working harder to maintain profit margins—let alone increase them. No one can anticipate what type of weather the winter will bring, and there is more pressure to reduce pricing and increase value to keep existing or attract new customers.   

Obviously, profit is vital to your business operations, and you shouldn’t be “guessing” at how much profit your business can make; it should be part of your budgeting process.

How much profit?
Determine how much profit you need. The amount of profit you must earn to support the needs of the business and growth goals needs to be balanced with your ability to produce the work that earns the profit. Begin with determining how much profit is required, then build up from the bottom of your budget. Add in overhead costs and estimate production costs to determine the revenue needed to support your goals. 

Profit, or the bottom line, is represented on the profit-and-loss financial statement for a given period of time (e.g. month, quarter or year). Profit is the money left over from sales after paying all related expenses to produce the revenue. Once a profit is earned, a business owner must decide whether to take the profits out of the company (via dividends or bonuses) or retain the profits to reinvest into the business.  

Profit functions
What is profit used for? It depends on whom you ask. If you ask a disgruntled or uninformed employee, he might retort that the owner stuffs his pockets with the profits at the end of the snow season. The wise business owner, who has provided financial training to his employees and managers, understands that profit does not simply line his pockets but is used to fuel the growth of the business, which provides increased growth and opportunity for those in the company. 

When budgeting, ensure that you will have sufficient profit to cover the following: 

1. Retire debt. Pay down current (12 months) outside debt obligations for property, equipment or other business loans.
2. Acquire fixed assets. Purchase replacement equipment to update your fleet, or buy new equipment or assets for growth.
3. Increase working capital. Retain and reinvest cash to fund current and future operations.
4. Bonuses. Award employees additional compensation.
5. Pay taxes. Pay federal, state and local income taxes.

How much profit you are able to allocate to each category will depend on a number of factors, not the least of which depends on how much you may have leveraged your growth or operations through debt.  Once you add up the first four items, you can estimate your tax burden. 

Know your numbers
Often, small businesses don’t know whether they have earned a profit until their accountant crunches the numbers at the end of the year and reports the outcome. Waiting until the end of the year is too late to determine whether you fell short of your profit requirements.

As you go through the season, your financial indicators should tell you whether you will hit your budget. Learn and use key numbers like sales volume, gross profit or gross contribution margin to get a pulse of how your business is running. If you determine part way into the season that you are not going to hit your profit requirements or goals by the end of the season, you can still make adjustments to hit your target. 

The perfect balance
Profit is like a three-legged stool where there must be a balance among price, sales volume and expenses. To earn more profit, you will either need to increase revenue (by price or volume) or reduce expenses. Before making significant adjustments, carefully consider the consequences of your actions. Too large of an adjustment one way or another could throw the balance off in your business.  For example, you may choose to increase sales to earn more profit; however, you need to make sure that the pricing is right and that you have the capacity to handle the extra work. If your pricing is too high, you may not win the work. If your pricing is too low and you gain too much work at a reduced price, the additional work without a means to cover your added costs will decrease profits. The inability to execute the additional work may result in service failure and losing clients. Increasing pricing alone may be an option, but in this economic environment, a price increase may be met with stiff resistance, and you may potentially lose customers. That decreased revenue, without a corresponding reduction of costs, will decrease profits, and—if extreme—could set you up to fail.   

Add and subtract … wisely
Perhaps the most expedient manner in which to maintain or increase profits is by reducing expenses—as long as it does not an adverse impact on service delivery or quality.

Many food manufacturers have downsized their products while maintaining the same price point. A 2-qt. ice cream container has now become a 1.75-quart container, and is no longer advertised as a “half-gallon.” Are we paying 12.5% less for the ice cream even though there is 12.5% less product?|
 
Be cautious about how and where you choose to reduce expenses, so your customers do not feel or perceive differences in service. If customers do not perceive the same value to which they have been accustomed, they may switch providers.

Reducing costs as much as possible is always wise, but look to make cuts in areas that are not strategic to the operation and growth of your business. 

If your strategy involves increasing revenue by increasing sales volume, keep in mind that for each new dollar you sell and earn, only a fraction falls to the bottom line. On the other hand, each dollar you save increases your profit by a dollar. 

No matter what strategy you use to attract new business and keep your current customer base, selling on price alone and discounting to win the bid is a recipe for disaster. If you reduce your selling price, there must also be a corresponding reduction in cost. Giving away your work at a lower cost to simply win the bid is a losing strategy. If you must give a price concession to keep or win the work, find a way to reduce your costs. Otherwise you are eroding your profit margin—and in this uncertain business, that is a dangerous path to travel.

Douglas Freer, CSP, owns Blue Moose Co., Inc. in Cleveland, OH.