Creating an Annual Profit Plan for Your Family Business

Winston Churchill once famously stated that those who don’t learn from history are doomed to repeat it – and that’s a fitting way to think about creating an annual profit plan.

To fully understand your business’s potential for the year, you must also fully understand its past performance and the internal and external factors that influenced it.

Drawing from our many years of family business experience at Ferguson Alliance, we’ve outlined below some of the key factors to consider as you review the previous year and plan for the future.

What is an annual profit plan?

You’re probably familiar with the practice of developing a working budget for each year, complete with forecasted targets and expected expenses.

Think of an annual profit plan in much the same way.

As capitalists, we work in pursuit of economic wealth – or as we like to say at Ferguson Alliance, prosperity.

With that in mind, we prefer the term “profit plan” to “budget,” because it’s more clearly descriptive of the ultimate goal – economic profit for your business and your family.

Why creating an annual profit plan is so important

In the absence of an annual profit plan, it’s easy for SALY to drive decision-making. (“Same As Last Year.”)

Many business leaders get into the habit of simply repeating the previous year’s actions, without taking the necessary time to analyze what worked and what didn’t.

In some ways, this approach can be effective, but in others it can get you into trouble.

The process of developing an annual profit plan is incredibly valuable because it provides the opportunity to evaluate past efforts against their results and to determine what you should repeat, what you should adjust and what you should divest from altogether.

The time investment associated with an annual profit plan

At Ferguson Alliance, we counsel patience when it comes to developing an annual profit plan.

This isn’t something to be rushed. We generally recommend that you expect to spend two to three months on your plan – starting from the point where you gather all your inputs and create your work plan.

This allows you adequate time to go through an iteration or two, perhaps even three, of various drafts and get to the point where you can adopt a more formal roadmap for the year.

The right inputs for an annual profit plan

The quality of your annual profit plan will only be as good as the quality of the information that informs it.

You’ve heard the old saying, “garbage in, garbage out,” and it holds true for annual profit planning.

You have to make sure the forecasts and reports that feed your annual profit plan are as comprehensive and accurate as possible.

Take the time to confirm a corrected or clean set of current year account history and balances before you start. Don’t begin by working on something that includes a high level of error or may not change your bottom line.

This process should entail a detailed, account-by-account analysis of the previous 12 months, so you want to have a reliable starting point. Make sure everyone involved with providing reports for this process understands the importance of clean and accurate data.

Once you’ve developed all your inputs, test the P&L result, plus the cash flow statement results of the profit plan and reconcile the resulting cash flow against the amount of cash on hand and cash available from any working capital resources.

How risk factors into an annual profit plan

It’s impossible to predict the future with 100-percent accuracy. That’s why any solid profit plan will also account for the risk inherent to engaging with the marketplace.

At Ferguson Alliance, we’re partial to an assumptions matrix that allows you to identify potential risks and stress test them at different levels for both macro and micro economic factors.

This includes factors that are specific to your industry and to your particular business.

Macro risks, for example, include economic headwinds of a general nature, including interest rate trends, fuel costs, tax rates, insurance costs, the availability of capital, etc.

Micro risks might include personnel costs, and one risk you can certainly count on is your own competitors.

All of these risks should be considered, along with the opportunities they present for your business.

Alignment between long-term vision and annual planning

The key to a truly effective annual plan is tying it into your long-term strategic vision.

Each year, your activities and priorities should drive you closer to those long-term goals.

As a practice, once the draft of an annual profit plan is complete, it should be reconciled against the milestones for success defined in the longer-term strategic plan.

After all, you want to know where you’re going – and you want to know when you’ve gotten there, or when you’re halfway there, or almost there. All of these milestones are important for achieving ultimate success.

Annual profit planning is a key tool in your toolbox for family business prosperity.

If this process represents a new journey for you, our family business advisors can certainly help you plan and clarify the nuances associated with this type of planning. Give us a call today – we’d love to help.

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