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- A Useful Acronym

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.  These have been part of planned series on goal setting. So far I have demonstrated ways to collect data useful in setting goals.

It is useful to have a structure around which to build the planning process. The acronym SMART provides that. Goals should be: Specific, Measurable, Attainable, Realistic, Relevant and Timely. SMART goals can be set as part of a Strategic Plan, a plan for the far future, or for a Tactical Plan, a plan for the near future.  Obviously a tactical plan should support a strategic plan.

Specific

Goals should be specific. Saying “I want to grow my business” or "I want to increase my profits" are not specific goals. Saying "I want my business to provide me with an income of $125,000 a year by the end of ten years" is. Saying "In order to provide that much income I must increase the sales of my business to $750,000 by the end of ten years" is. These can be fleshed out with specific sub goals for the actions that must be taken to make the primary goals happen.

Measurable

 Goals should be measurable. If your goal is as stated above, saying "I must increase sales 11.5% each year over the prior year starting from this year's $251,000" is measurable. If a sub goal is that "To do that my sales per square foot must grow from the current $209 to $400" you have another measurable goal. Further, saying that "I must plan for a move to a larger space 5 to 7 years from now because sales growth above $480,000 will be restricted by my current  1,200 square feet" provides another specific goal.

 Attainable

Goals should be attainable. Saying " I must achieve sales of $750,000" after you have concluded on the basis of research that stores in your industry can and do achieve that level of sales is an attainable one. Similarly, saying "I want personal income of $125,000 from the business" is attainable if your research has demonstrated that stores in your industry can and do throw off personal income at that level.

Relevant

 Goals should be relevant. Saying "As one means of achieving sales growth I will identify and add to my offerings one new line of higher margin women's clothing each year for the next five years" is relevant as well as specific, measurable and attainable. Saying "I will sacrifice personal income growth for the next two years by spending twice the national average on advertising as a percent of sales in order to build my client base" is also relevant. Saying "I will investigate adding a line of men's clothing in each of the next three years as a way of building sales " is not relevant because it is likely to be a distraction from the core business.

Timely

Goals should be timely. That is, goals should be set to specific time frames. Saying "I want to increase sales from $251,000 to $750,000 someday" is not timely. Saying I want to increase sales year over year by 11.5% until I reach $750,000 in ten years is timely. Saying "I must find a new 1,800 square foot four years from now so that I am ready to move when my lease ends five years from now" is timely.  Putting your goals within a specific time frame provides a way for you  measure results and stay on track.

The next blog will provide an illustration of a simple strategic plan for the fictional women's clothing store.

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 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.