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.
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.