Often when you need to achieve a targeted amount of profit for your firm, you set certain actions you need to take to reach this goal. This is called profit planning and it’s incredibly useful, especially for the A/E industry.
While we all go into business wanting to make a profit, this doesn’t always happen. A lot of times this can be due to poor planning. In this article we’ll talk about what exactly profit planning is, the benefits, and some best practices to get you started.
What is Profit Planning?
Profit planning involves setting a profit objective for a budgeting period. The process then requires making certain decisions before and along the way to help you earn more profit and make your projects more profitable. Profit planning is good not just for how you will earn a profit today, but also how to create a solid plan for future profits.
You don’t have to create a complicated plan for it to work. But to make sure that everyone is aware of your plan and goals, it should be put into writing. Your profit plan may originally start out very simple, but as your firm grows, so can your planning.
Typically, a profit plan is part of a larger plan, such as a strategic plan. Some of the following areas that are good to include in profit planning are:
Why is Profit Planning Important for Your Firm?
Profit planning is important because it helps you know if you achieved your goals. If you don’t have a plan, you don’t have insight into the full picture. Are you making more profit than you ever imagined? Or are you severely under? You might think you want your firm to make $100,000 a year in profit, but without a plan, how do you expect to hit that number? Having a goal and plan to get there gives you a clear picture and a set path.
Profit planning can also be used to achieve both short-term and long-term objectives. If you started your firm with $30,000 in profits, and your business continues to grow and improve, you can set a plan to double those profits in the next year to $60,000.
Profit planning provides details, such as increased labor costs, that give you the greatest chance of reaching these goals.
Profit planning also gives your firm a baseline on which to measure success. Establishing and measuring against a baseline helps your business grow and through profit planning you can make the necessary adjustments along the way.
While you work hard to bring incredible projects to life, it’s important not to forget about the backbone of these projects—your team. To take care of your employees you need to make enough profit. A profit plan allows you to have enough not only to pay employees well, but also to invest in their training and education. This helps to keep employees happy and growing at the same time.
Benefits of Profit Planning
Now that we’ve talked about profit planning and why it’s important for your firm, let’s point out a few clear benefits. As mentioned earlier, profit planning helps you define a goal and the steps to reach that goal. If you target $100,000 for the year, you can create a strategy to reach that goal with the following questions:
What are my maximum costs?
How many services/projects will I need to complete to reach my goal?
How much should I charge for my services/projects?
How big of a team do I need to reach my goals?
Where should I reduce expenses?
Where should my gross profit margin be?
The answers to these questions can help you build a solid budget plan to go along with your profit planning.
Profit planning allows not only you, but also your employees to have clear objectives. This ensures that all your employees are on the same page when it comes to your strategic goals. If your employees have no idea of your goals or profit planning process, you can’t fully expect them to keep up. When you have a profit plan that your employees can see and adhere to, this gives them a clear picture of your expectations.
Best Practices for Profit Planning
Some best practices for profit planning are as follows:
Set your goal. One of the biggest things to do, if not THE biggest, is to set your goal. Set a clear target for your annual profit and then a few objectives you’d like to reach throughout the year. Decide how much you’d like to make annually, and then set up monthly (or quarterly) profit goals. This way you have a good idea of what needs to be done to reach your goal.
List your expenses. Know all your details, especially the expenses of your business. Calculate your direct labor costs and overhead costs. This can include annual salaries and even software expenses, such as new project management software, to help you reach these goals. Now you’ll know how you’re doing on your estimated budget and if you need to make any adjustments.
Determine your profit margin. Your profit margin is the amount by which revenue from your services exceeds the costs of the firm. This is important to keep your firm going. The best way to figure out your profit margin is with the following equation: (Net profit ÷ Revenue) x 100 = Net profit margin. This helps you know how much you need to increase your revenue or lower costs to help you reach that desired profit margin.
Use cash flow forecasting. Once your budgeting and profit planning is complete, you can create a cash flow forecast to get more details about your plan. This gives you a guide to use and can help you determine if projections are off, and if you need to make any changes.
Keep Track of Your Goals with BQE CORE
Profit planning doesn’t have to be difficult. Think of it as a guide to help you reach your profit goals. If you’re handling your profit planning manually, or with outdated software, this can be where things get tough. Firm management software, like BQE CORE, can help you set your goals while giving you all the tools you need for seamless profit planning from beginning to end. BQE CORE is designed by an architecture and an engineer for the A/E and professional services industries with the goal to make planning and back-office processes easy, so you can focus on what you love doing—making incredible projects.
BQE CORE’s all-in-one dashboard gives you the tools you need for profit planning with project management, time and expense tracking, billing and invoicing, forecasting, reporting and analytics, and more. Try a free demo today and see just how easy it can be to reach your profit goals!