I expect most readers will immediately understand what a Business Plan is but are asking themselves what a Profit Plan might mean? That is probably because it is not a commonly used term, but is something that Empiric Partners have been doing for over a decade. Based on financial forecasting and modelling it places an emphasis on maximising profit and sustainable growth. This might sound like something that is out of your comfort zone, but nobody knows your business better than you do and we use highly developed and proven templates so that the input about your own business is all that is required.
New or Existing Business
If you are starting a new business, then a business plan makes a lot of sense. It does not always need to be a 30+ pager but being prompted to think about what you will need and how you might go about things can help to avoid early pitfalls and get your business off to a good start. Profit planning is difficult at this stage because everything is usually based on theory, so a simple financial budget and cash flow forecast is more appropriate. Conversely, if you are an existing business that is not looking to radically change or diversify, you may feel that writing a new business plan is a time-consuming exercise that simply commits to paper what you already have in your head or what you are already doing. Whilst this view is clearly open to challenge, the same is unlikely to be true with a Profit Plan. Unless your business is very stable and predictable, knowing what your detailed sales and costs are going to look like month-by-month, even for the next 12 months, can seem challenging. You will need to consider how your sales mix will affect your profits and cash flow, how this might be impacted by sales and marketing efforts and how you might structure staff over this period and for the future. Add the need to factor in inflation and risk, does mean it is almost impossible to visualise and adapt without a written plan! A business plan does not really work without a financial plan, but a good profit plan can function as the basis and focus of your business plan.
Unlike a Business Plan with its much wider scope, a Profit Plan has a predominant focus, i.e., maximising and sustaining profit, which involves a deep dive into the current customer mix and costing process. A customer that creates 50% of your sales but drains 80% of your resources and pays late, may not be the best fit for your business. A client that appears to provide a healthy profit margin on paper, but generates a lot of hidden costs, such as holding inventory or taking up storage, transport costs, administration time, high risk of needing to rework etc. may actually be your least profitable client in reality.
A detailed business plan will tend to contain elements that are correct at the time of writing, such as the size of the market, and assumptions on your staffing plan for the next three years. Of course, even within a short time, what actually happens in your business can be quite different to what your business plan originally predicted. Keeping up with these changes is likely to become quite onerous, if you were to continually update the detailed plan which might involve updating graphs and visuals. In contrast, adjusting forecasted figures in a Profit Plan based on actual performance can be done much more quickly.
A profit plan is very black and white, a target is set, and the actual figure can be directly compared. The impact of shortcomings and delays can be seen immediately and provide impetus and motivation to bringing things back on track. Being accountable for achieving a business plan is difficult, especially if it contains a lot of big goals without a clear action plan or breakdown. It can be easier to excuse shortcomings because things changing or pushing back is almost inevitable.
In conclusion, whilst we would always endorse having an up-to-date business plan, even if this is a condensed plan or canvass, we know that in reality a lot of successful businesses function without one. In contrast if you do not have a Profit Plan or something equivalent in place, then there is a strong likelihood that your business is not running as well as it could and not achieving its full potential. This will impact your profits, investment opportunities, and the value of your business. There is nothing more powerful than realising increasing profits when you are following a growth strategy. Having absolute confidence in your plan when you are working hard and cash flow is tight, is what will help you sleep well at night!