Business Owner Mistakes: Not Understanding Their Revenue Model and Current Sales Plan

Sales Plan

 You don’t have to be a CPA or CFO to develop a useful revenue plan. Sure, it can get complex, depending on the type of business you have, but at the end of the day it’s revenue and profit that drives your business.

Business owners need to forecast sales and revenue as the starting point to any business’s success as specifically as possible. With a solid forecast in place, you can see if you are hitting your basic numbers, but when you add in rolling forecasts, you can tweak to see even more improvement. Here are some steps to getting there:

  • Break down your historical sales by customer segment, service, market, and product line.
  • Get your sales team involved for their feedback.
  • Understand your customer segments and their buying attributes.
  • Forecast any new product sales this year.
  • Project how many new customers you gain a year, and determine how many customers do you lose each year.
  • Find out the average level of sales per customer.
  • Record your average invoice value.
  • Discover how many units per month are purchased per customer.
  • Think through the average selling price per unit by segment.
  • Understand the direct costs to forecast gross profit and gross margin (gross profit = sales – cost of sales; gross margin is gross profit / sales)
  • Understand sales (and collection) timing – Is there seasonality to your business?
  • Communicate the sales plans and results to the team continually.

Using this data, document your sales assumptions, your sales force growth, market growth, new product timing, new customer revenue, and existing customer revenue.  Develop a specific and realistic forecast (one page on Excel) by segment by month.  Measure actual results against it constantly.

The sales forecast needs to be a stretch to cause excitement with your team, but also realistic and reachable to ensure the team is motivated for success.

I’ve made the mistake both ways.  I’ve been much too optimistic with goals that are way too lofty and not perceived as achievable.  Actual results can be quite de-motivating to the entire organization.  On the other hand, I’ve set sandbag goals that are easy to hit.  This fosters complacency and can really slow your business’s growth potential.  The best way to find balanced goals is to work together with the sales team with the intention developing an aggressive forecast to accomplish together as a company.

Revenue models generally don’t change much. Don’t make the mistake of doubting the businesses’ revenue model and over-complicating things with continually changing sales plans.  This inevitably leads to confusion like a squirrel crossing the road.  Understand your customer needs and company’s value exchange then run with it.

Then, make sure to have timely feedback loops and adjust plans based on actual data. “What gets measured, gets managed.”

Don’t stick your head in the sand if you are not hitting your sales numbers plan. Take the necessary action to get back on track.

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Now that you have some early sales results for the year, this is great time to evaluate this year’s sales plan.

How are you doing vs. your expectation so far?  How is the sales team doing?  Are you hitting your new customer goals, measured against the assumptions you made developing your plan?  Make the adjustments now to set yourself up for a successful year.  I currently have a client that was already significantly off on their sales plan.  They were proactive and just completed a full review and now have a much better plan for the rest of the year.  I can help you do the same. Contact me for details.

Business Owner Mistakes: Not Analyzing Customer Sales and Margin

matrix

Customer sales and margin is a sensitive area in business analytics.

When we look at customer sales,  we sometimes find we don’t know our customers very well.  This is the prime function of your business–to serve your customers.  Remember that!

But to improve profitability and cash flow we need to look at margin (sell price less cost of sales).  We know our customers don’t want to pay more so increasing pricing many times is not an option.

I remember working with a computer business some time ago. Margins were shrinking to single digits. The owner would say “It’s not what you sell it for, it’s what you buy it for.”

He certainly was right, but there are still many ways to increase overall margins and profit.  For higher volume businesses such as retail, medical practices, distribution companies, etc. we need to analyze customer sales and customer gross margin on a macro level, then dive into it in a granular way.

I like to use the profitability/volume matrix above to help me identify some parameters.

I’ve used the profitability/volume matrix above with companies of all shapes and sizes to identify some parameters and thoroughly analyze their sales and margins.

At a small truck parts distributor, we defined customer segments and allocated all related costs so that we had sales, gross margin dollars, gross margin percentages, allocated costs, and net margin broken down by customer.  We moved the definition for ‘volume’ and ‘margin’ so 80% of their customers fell into the low volume and low margin quadrant.   (The old 80/20 Rule…..by the way. Read The 80/20 Principle by Richard Koch and see the resource page for a useful 80/20 tool.)  We looked at the attributes of the customers in the low volume/low margin, and the attributes of the high volume/high margin quadrants.

We worked with the sales team, sharing the data and developing specific markers and targets, again on an 80/20 basis.  We worked to increase the size of smaller orders (which made sense for many of their customers as well), we analyzed lower margin product lines and specific pain points, and addressed a customer set-up process with improved  margins from the get-go.  We involved the sales reps in order to make these modifications successful.   They became part of the process.  They were the ones who identified the issues and were responsible for implementing the changes.

The company increased gross margin 4.2% over a three-month period and generated $150K of additional annualized profit in that period.  Not bad for a few hours of work.  We continue to use this analysis a couple times per year this group’s sales team, and overall margins are tracking upward in an industry that has seen margin decline.

And don’t kid yourself about your true costs.  I worked with another company a few years ago doing the same analysis.  We determine that half their product line was being sold at barely a break even point.  It’s impossible to have profit if you’re taping $5 to every box you ship.  Be careful of thinking that you will make it up with volume–the more you sell, the more you lose.  For this company, we ended up going back to the P&L to eliminate as many costs as we could with a value stream map on that particular customer group.  We went to the customers for a long overdue price increases.  Those discussions went better than we expected.  End result: after 12 mos: $500K swing in profits and back to profitability!

I hope you are convinced by now of the value of analyzing customer sales and margin. I can help!