Running a Business

Growing a Business

A blog for businesses with 20 or fewer employees or for people planning on starting one. There are two threads. One for Starting a Business and a second for Growing a Business. Author: Henry McCabe.

Goals- Industry Profiles

In my last few blogs  I have written about creating Someday Goals as a prelude to setting long term goals for a business. In effect a ten year Strategic Plan. Doing so requires some research using your search engine, local library and physical observation in a local market area.  I have been using a fictitious women's clothing store as an example to illustrate the process.  In the last blog I reported on data collected to evaluate whether or not it would be possible for the store to achieve $600,000 a year in sales, the amount that a preliminary calculation indicated would allow the owner an income of $125,000. The data supported $600,000 as being achievable. In this blog I report on research into the probability that the store could produce $125,000 of income.

The result was not what was hoped for. The following table summarizes the data. The yellow columns shows the pre-research guess as to results. The green column shows what is probable based on the data described below. The owner may have to re-consider his/her plan because appears that achieving the income goal will require much higher sales. That is the nature of the planning process. Plans must be reworked or dropped as data becomes available.

Results of Profitability Research
Item	Early Estimate		Reality Check
Revenue	100%	$600,000	100%	$600,000	$825,000
Cost of Sales	50%	$300,000	53%	$318,000	$437,250
Gross Profit	50%	$300,000	47%	$282,000	$387,750
Expenses Net of Depreciation	30%	$180,000	32%	$192,000	$264,000
Net Cash Flow	20%	$120,000	15%	$90,000	$123,750

The reality check data came from one primary source- IRS summaries of sample tax return data. In this case a report on a sampling of tax returns submitted by proprietorships. The data is available from the IRS. It comes in the form of MS Excel spreadsheets of 150 columns by 100 lines. The columns are by industry. The lines by tax return item. You can select data for the industry you are interested in and format in a way that provides what you need. The idea is that the IRS data provide a real life profile of the finances of businesses in a particular industry.  Data is also available on corporate form tax returns, but I chose proprietorship data because in that form profits equate to owner income whereas in the corporate form owner compensation is partly buried in the Wages and Salaries line.

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 The following table illustrates the data for tax year 2010 with the two right hand columns showing what happens when the ratios are applied to different sales amounts. There are three important things to remember about the ratios. First, the businesses in the sample are small and might not be representative of a larger business. Average sales are about $112,000. Second, I chose the set of data applicable to business that made a profit. The full data set includes another 65,656 businesses that did not show a profit. That alone is worth noting- 47% of the businesses in the 2010 sample did not show a profit.  Running a business is risky. Finally, the ratios are averages. Some business did better and others worse. Still, it is a reasonable and free set of facts to use in decision making.

Sampling of 2010 Tax Returns			Projected	Projected
Proprietorships with Income			Results	Results
Clothing and Accessory Stores			For	For
Source- Internal Revenue Service Tax Statistics			Pretend	Pretend
Dollars in Thousands			Store	Store
Tax	Total	Per	Using	Using
Return	of 73,441	Cent	Same	Same
Item	Returns	Revenue	Per Cents	Per Cents
Revenues	$8,228,437	100.00%	$600,000	$850,000
Cost of Sales	$4,263,101	51.81%	$310,856	$440,380
Gross Profit	$3,965,336	48.19%	$289,144	$409,620
Salaries and Wages	$424,059	5.15%	$30,921	$43,805
Contract  Labor	$19,982	0.24%	$1,457	$2,064
Rent	$720,506	8.76%	$52,538	$74,428
Taxes	$144,647	1.76%	$10,547	$14,942
Interest	$46,215	0.56%	$3,370	$4,774
Amort & Depreciation	$71,792	0.87%	$5,235	$7,416
Advertising	$172,512	2.10%	$12,579	$17,821
Benefits & Pensions	$13,253	0.16%	$966	$1,369
Insurance	$66,156	0.80%	$4,824	$6,834
Home Office	$51,643	0.63%	$3,766	$5,335
All Other Expenses	$1,122,169	13.64%	$81,826	$115,920
Total	$2,852,934	34.67%	$208,030	$294,709
Net Profit	$1,112,402	13.52%	$81,114	$114,911
Add Back Depreciation	$79,635	0.97%	$5,807	$8,226
Net Cash Flow	$1,192,037	14.49%	$86,921	$123,138

Those who do not want to download and mine the IRS data directly can make use of bizstats, a web site on which you can find the ratios listed above for 140 industries together with a convenient calculator that will create a profile like the two right hand columns. The free web site is maintained by bizminer, a service that complies and sells business information. You can also purchase data from other places such as Hoovers and the Risk Management Association.

Be careful when using the bizstats data because it uses information from one year only, currently tax year 2010 proprietorship return data. Results vary from year to year. For the Results of Profitability Research table I used five year averages to smooth out the year to year variations. I did not do it, but one could create a spread sheet with all line items for five years and average that out.

Comparision of 2006 Through 2010 IRS Data- Non Farm Proprietorship Tax Returns
Item	2006	2007	2008	2009	2010	Average
Revenue	100.00%	100.00%	100.00%	100.00%	100.00%	100.00%
Cost of Sales	53.73%	54.18%	56.45%	50.80%	51.81%	53.39%
Gross profit	46.27%	45.82%	43.55%	49.20%	48.19%	46.61%
Expenses Net of Depreciation	30.08%	31.66%	31.21%	32.91%	33.70%	31.91%
Net Cash Flow	16.19%	14.16%	12.34%	16.29%	14.49%	14.69%
Net Cash Flow Rate Applied to Different Revenue Amounts
On $600,000 in Revenue	$97,140	$84,960	$74,040	$97,740	$86,940	$88,164
On $750,000 in Revenue	$121,425	$106,200	$92,550	$122,175	$108,675	$110,205
On $850,000 in Revenue	$137,615	$120,360	$104,890	$138,465	$123,165	$124,899

At this point my pretend store owner has what is needed to create a one page strategic plan. I'll create one for the store after a discussion of SMART planning in my next blog.

Planning. The only thing we know for sure about any plan we make is that actual events will turn out to be different. We must not let the attempt to create a perfect plan get in the way of completing one. An imperfect plan is better than none at all. 

Running a Business

Growing a Business

A blog for businesses with 20 or fewer employees or for people planning on starting one. There are two threads. One for Starting a Business and a second for Growing a Business. Author: Henry McCabe.

Goals- Industry Profiles

In my last few blogs I have written about creating Someday Goals as a prelude to setting long term goals for your business. In effect a ten year Strategic Plan. Doing so requires some research using a search engine, local library and physical observation in a local market.  I have been using a fictitious women's clothing store to illustrate what can be done. Check earlier blogs for sources and results covered to date. The purpose of the research is to use industry profiles to establish that it is possible to reach the sales goal of $600,000 that is required to meet the fictitious owner's income goal.

In the last blog I mentioned two data bases from which a person could get more data. Reference USA and AtoZ charge subscription fees but can be accessed for free through the many library systems, colleges and universities who are subscribers. They have similar data sets. I have access to AtoZ via my library so I looked there. Sorry I cannot provide a link to my library. AtoZ contains data on both businesses and consumers that is searchable and downloadable. The data is supplied by DatabaseUSA, a company that compiles data on businesses and sells it in various forms.  I searched for stores in my county using two NAICS codes, one for women's clothing stores (448120) and another for department stores (452111) and downloaded the resulting 15 column spread sheet.

The spreadsheet contains details on 61 stores. I was primarily interested in DatabaseUSA estimates of the annual sales of independent women's retail stores and added department stores as related businesses. The file contains estimated sales and number of employees for each store.  Some analysis indicated that DatabaseUSA estimates sales based on a Sales per Employee factor and an estimate of the Number of Employees in each store. Not 100% solid data, but at least it is something. Privately owned companies rarely make their numbers public so Database USA has to estimate on some basis. Unfortunately, they do not disclose how, at least in the free AtoZ version. The table shown below summarizes the data divided into several groups.

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I was hoping that the data would confirm the sales estimate for the average women's clothing stores found in the SizeUp data I wrote about earlier. That number was $500,400, much higher than the average $293,000 for Small Stores in this data. It is annoying when data doesn't support a theory, but that is the way it goes. Still, of the 13 stores the two largest were estimated to have average sales of $580,000. Twenty two stores (including the 13) with average sales per employee less than $125,000 have average sales of $478,000. Twenty five stores (including the 22) with  average sales per employee less than $150,000 have average sales of $702,000. Those three subsets of the data more or less confirm that it would be possible to achieve sales of $600,000 (or does it confirm that a researcher can make data fit a theory?).

AtoZ Data-  Women's Clothing & Department Stores in My County
	Sales per	Estimated	Estimated	Average
Number	Employee	Total	Total	Est'd Store
of Stores	Factor Used	Employees	Sales	Sales
Small Women's Clothing Stores
1	$100,000	1	$100,000	$100,000
12	$116,000	32	$3,712,000	$309,333
13	$115,115	33	$3,812,000	$293,231
Small and Medium Sized Independent & Chain Stores
2	$100,000	16	$1,600,000	$800,000
7	$116,000	44	$5,104,000	$729,143
1	$127,000	11	$1,397,000	$1,397,000
2	$131,000	43	$5,633,000	$2,816,500
1	$152,000	28	$4,256,000	$4,256,000
1	$170,000	2	$340,000	$340,000
22	$171,000	562	$96,102,000	$4,368,273
1	$186,000	4	$744,000	$744,000
1	$195,000	13	$2,535,000	$2,535,000
38	$162,809	723	$117,711,000	$3,097,658
Large Stores (average sales per employee varies)
10	$653,516	483	$315,648,000	$31,564,800
All Stores
61	$352,842	1239	$437,171,000	$7,166,738
Subsets of the Data
Two Largest Independent Stores
2	$116,000	10	$1,160,000	$580,000
Stores with average per employee sales under $125,000
22	$113,075	93	$10,516,000	$478,000
Stores with average per employee sales under $150,000
25	$119,361	147	$17,546,000	$701,840

By now readers may be wondering why they should go through exercises like this as part of their planning process. After all it takes hours to do it. The answer is simple. It is better to make plans for the future based on facts rather than on pure guesses even if the "facts" are somewhat spongy. The owner of a business that achieves success will probably spend 42,000 hours working in it before retiring after 20 years. 40-80 hours spent now planning to make those hours worth the effort is not much of an investment in light of that. Next, can a $600,000 women's retail store generate $125,000 in income for its owner?

Planning. The only thing we know for sure about any plan we make is that actual events will turn out to be different. We must not let the attempt to create a perfect plan get in the way of completing one. An imperfect plan is better than none at all.

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