How A P&L Forecast Prepares You to Win Big for 2020! (Year-End Planning Series, Part 3)
We kicked off our 3-part mini-series for year-end planning by talking about sales forecasting and setting sales goals. In this article, we’ll talk about the three things you need to do to create accurate, inspiring, and actionable goals!
For years as a distributor, I lived by our P&L and budgeted by it religiously. Thanks to a savvy CFO who ingrained in me that the income statement contained all truth about our business health, I reviewed it obsessively. He was careful to remind me that we were looking at past history, but it contained keys to our progress (or regress).
Monthly, we would sit around the table and review three simple things: monthly sales to goal by business category, monthly expenses to budget, and YTD figures for both. And at year-end, since we had a working document of historical expenses and sales history, we used it as our forecast for budget planning and future modifications.
Definition: A profit and loss budget is an accounting tool used to estimate or project future revenues, expenses, and income. Profit and loss budgets are planned based on historical records of past income statements.
In this series on year-end planning, we covered how sales forecasting can make you more successful and how to set sales goals that hit the target. Armed with those two practices, the last year-end planning task we want to do is set our budget based on our goals.
Using a P&L based budget is the most accurate way to plan your investments as it gives you both a historical glance at where you’ve traditionally spent your money, as well as a side-by-side glance against your goals. Like the dashboard in your car, it can give you a current health status, any warning signs you should be aware of, miles to your destination, and more.
As you budget for the upcoming year, there are many categories to consider, but for our industry, we’ll focus on the ten most essential categories you should emphasize.
Ten Key Categories for a Promo P&L Forecast
Profit: You (hopefully!) saw a healthy profit in 2019 and if so, your business is in good shape as you grow. If the trend continues, a critical question to ask is where will you spend that investment? If you saw a decline in profit, a critical question to ask is where do we need to cut back but more importantly, where do we need to invest to grow our sales?
Marketing & Advertising: Using your sales goals as our guide, if your goal was to increase sales by 20%, your marketing category should also increase. How much will your marketing investment need to increase? To accomplish your goals, what do you need in additional resources? Do you need more marketing personnel? Marketing materials? Attend more events? Build more campaigns? Are we going to amp our website? Social? Your marketing spend should be a non-negotiable, it’s not a “nice to have if we have enough profit,” it’s as vital as any category in your business.
Training: You are investing in ongoing training, right? Not only investing in training for your support team but particularly for your sales team. Most distributors rely too much on the product side of sales training -sending reps to shows, for example- but this should not be your only investment. To amp your sales team and keep them sharp, what sales training are you considering for the upcoming year? If you don’t know which training you will select yet, at least add an expense category for this now to ensure you have the budget allocated.
Salaries and commission expenses: Do you need more salespeople? Have you considered salary increases as a part of your budget planning? Is team restructuring what you need to do to help you hit your goal? Do you need additional personnel in any area? Are there commission structures that need revising?
Tech: Future technology investment is never a question, it’s an imperative. When I was a distributor, this category was the most important for me, I knew that to stay relevant, we needed to always invest in our tech category and make sure we had the best resources, giving our team the right tools for growth. What tech investments will you need to consider for the upcoming year?
Spoilage: It happens. Projects go south and you end up eating the cost on items, do you have a spoilage category? If your sales are going to grow by 20%, your spoilage category should increase as well.
Capital Expenses: Does our team have all the right tools? In today’s fast-paced environment, every rep should have the latest tools to ensure they can respond quickly to the market. Do you need to invest in more cell phones? Computers?
Showroom and samples: Again, based on future growth projections, your sample costs, and any showroom modifications, might need to be taken into account for future increase.
Cutting Expenses: Were there categories that were overblown for the previous year? What were they and why? Are there areas where we can cut expenses so that we can invest in other categories?
Projecting Profit and Cashflow: An essential part of the annual budgeting process is to project your future growth for profit and cash flow purposes. Budget this number (monthly) now so that you can monitor your progress as you grow and ensure you have enough profit throughout your ongoing year.
That lifeless income statement with numbers was my lifeline each month, we lived by our P&L. We found it helpful to review our budget and income statement monthly, but we paid close attention to quarterly results as the 3-4 month period can give you a more accurate indication of trends.
With dedicated, ongoing analysis, a P&L budget can help you pivot quickly as you spot problematic areas where spending is out of control, or monitor whether or not you are investing in future growth.
By now you’ve hopefully created a sales forecast and amped your sales goals, the P&L budget is the final tool you need to plan for a kick-ass year!