I’ve had several discussions lately with a business owner about his marketing and sales strategies. Examination shows he plans meticulously and executes well. He has taken several online marketing and sales courses and applies their lessons. However, he has a vague feeling that the results are not as rosy as he thinks. Although sales are up, profitability remains thin and uncertain.
My friend was amazed when I said his problem was not unique and that the solution is simple.
He has the marketing and sales cart before the goal-setting horse. He develops his marketing plans and sets his marketing goals without understanding their effect on his overall financial goals.
Although his marketing and sales efforts are quite good, they don’t correlate with his business plan. He really has no idea of the financial contribution to profit required of his marketing plans.
Let’s take a look at using financial goal setting to shape marketing and sales goal setting.
The critical first step is to determine the level of sales needed to fund all financial goals including a reasonable owner’s salary, a retirement plan, taxes, reduction of debt, and a minimum profit level. This is an important step even if your business is relatively new.
Set this critical sales goal by sorting your various expenses into those that are fixed (monthly rent, for example) and those that vary with sales, such as cost of goods sold and labor. Total the variable expenses expressed as a percentage of sales and subtract from 100 percent. The answer is the amount of every sales dollar that is available to pay the fixed expenses. Total the fixed expenses and divide by the fixed-expense percentage. The answer is the sales level required to meet your financial goals.
Let’s look at a typical example. Mary’s restaurant has variable expenses as follows: food cost 35 percent, labor cost 30 percent, supplies 2 percent, and advertising 3 percent for total variable expenses of 70 percent. Her percentage of sales available to cover fixed expenses is 30 percent (100 percent minus 70 percent equals 30 percent).
Mary’s fixed expenses total $200,000. Dividing $200,000 by 30 percent reveals she needs roughly $670,000 in annual sales to achieve her financial goals. This annual goal amounts to $56,000 monthly. Now Mary knows the amount of sales her marketing plan must generate. She also knows that if she changes anything in the variable or fixed-expense assumptions, she must recalculate her sales goal. It is common for an owner to reduce prices for a sale and not understand that the total sales required will increase.
My friend left our meeting not only with an understanding of how to set and implement his marketing and sales plans; he also realizes it is time to more deeply understand other aspects of his business. It is often easier to reduce an expense item than it is to increase unit sales.
Financial goal setting is often the first step to a more intimate and profitable understanding of your business.
Bowser@BusinessValueInsights.com. Dan Bowser is president of Value Insights, Inc. of Durango, Chandler, Arizona, and Summerville, Pennsylvania.