Business Planning - 2

By Geoff Coy, Certified Practising Accountant

In this article Accountant, Geoff Coy, looks at the numbers involved in developing a business plan for your business

In the last issue we looked at the starting point for the preparation of a business strategy for your business. We considered how the business strategy must reflect the goals and objectives that you have set for yourself and the business.

We will now translate the business strategy into a budget for the coming year.

The best way to do this is to take Con's Convenience store and imagine you as the owner.

Goals for the business

Con's is a fairly typical metropolitan site with fuel sales averaging 300,000 litres per month and shop sales of $80,000. An additional $35,000 is generated through the site' three bay workshop.

Like many other dealers you'd like to acquire a second franchise, pay off the house and maybe win the occasional incentive trip overseas. However, your main goals for yourself and your business during the year are:

• To reduce your overdraft by $30,000;
• To pay yourself a salary of $60,000 per annum and have a bit more leisure time away from your business particularly at weekends.

In order to achieve this you'll need to start making the business perform a bit better, so you decide to set yourself the following strategy:

• Fuel volume to increase by 1% over the coming year;
• Shop sales will need to increase by 2.5% per month with an average gross profit margin of 32%;
• You will also need to boost your workshop sales by 2.5% and achieve an average gross profit margin of 62%.

 

To achieve these strategies you will need to be competitive with your fuel pricing and make maximum use of oil company promotions and implement a few new ideas on merchandising in the shop.

 

Achieving targets

These ideas, together with regular workshop promotions, additional staff training and improved management practices should be enough to achieve the targets you have set yourself.

We can now translate this strategy into a budget for the coming year. This is best done by using a spreadsheet in your computer. If this sounds a bit daunting then get your accountant to help you. If your accountant can't help you then find one who can.

Table 1 shows an analysis of the business performance which you expect to achieve if you don't make any changes to the way you run your business.

The business made a modest profit of $1,047 after interest but before tax and paid Con a salary of $48,000.

For space saving reasons we have only shown the months of July, August and September and the totals for the year.

Table 2 shows your budget for the year and includes the sales figures which you plan to achieve for fuel, showroom and workshop.

A percentage increase rate % can be used in preparing the spreadsheet which may need to be revised several times to ensure they are accurate and realistic.

You can insert formulas into variable expense items such as credit card charges, royalties, superannuation and workers compensation insurance which will automatically change each time you make a change to your incremental sales %

Maintain your budget

Keep a copy of your budget close by throughout the coming year. It's your guide for running your business. You should be comparing your ACTUAL performance with your BUDGETED performance on a weekly or monthly basis throughout the year.

It's also a good idea to save a copy of your budget so you can substitute BUDGETED figures with ACTUAL figures at the end of each month. This will tell you how your current performance is affecting your overall plan.

The final point you need to consider as part of your business plan is the overall state of the business and in particular, the RETURN you are achieving on your investment and the assets employed.

TABLE 3, marked 'Investment' shows your actual and projected balance sheet for the end of the year.

Table 4 shows your return on total assets employed and the return on your own funds invested within the business.

These percentages tell how efficient your business is using the funds employed and reflects the ability of your business to generate earnings.

A low ratio indicates that Con could have made more money investing in something else

Table 4 indicates that Con's Convenience Store has achieved a return of only 5.01 % on total assets and a paltry 1.23% on his own funds invested.

However, Con expects with his new budget that the return on assets employed will increase to 18.58% and an increase to 33.38% on his own investment.

Aim for a 25% return

It's my opinion but I think you should be aiming for a return of at least 25% on total assets employed to make it all worthwhile.

This means that Con's Convenience Store should be returning $68,750 per year in net profit before interest and taxes on top of your salary rather than the $51,106 shown as Net Profit before interest in table 2.

If your return on total assets is less than the interest rate you are paying on borrowed funds, then your business is slowly devouring its own capital and going backwards.