DIY: Making a Profit Improvement Plan

Let’s set the stage: you’re creating a specific profit target and have calculated a figure that represents 40% of your Equity (ROE).

You subtract your monthly expenses from your income – and find a huge gap between your profit and your profit goal!  What do you do then?  (No, it’s not OK to throw in your chips and go back to work for your old company…)  Your next step is to create a “Profit Improvement Plan”, which identifies things you can do to bridge the gap between your projected profit and your new target.

Here’s how to proceed.  First, write down the amount of your shortfall, and then answer three questions:

1. What can you do without?
2. What can you charge more money for?
3. What can you do differently?

Starting with the first question, make a list of everything your business can do without, and note the savings associated with each line item.  The total of these savings may be all you need to do to hit your new profit target.

If the cuts themselves won’t get you to your goal (they usually won’t), then take a hard look at question #2; what you can charge more money for.  While the owners of most small businesses are very reluctant to do it, consider raising your prices.  You don’t have to raise all of them (more on this in a later posting), but raising some of them should add enough to bridge the gap in your profit improvement.

If the total contribution of your cuts and increases doesn’t meet your profit improvement goal, then go to question 3.  Are there fundamental things about your business that you can change?  Can you alter your product or service offering, or the way you deliver it?  Can you partner with someone who also serves your customers – and cross-sell offerings to each other’s customers?  In considering the possible answers to question 3, it’s a good idea to talk with your advisors – people who understand you and your business but aren’t buried with the details of your daily operations.

If you’ve answered the questions and haven’t hit your profit improvement goal, go back to question 1 and start again!