Think cumulative. Review your gross profit target every month, and definitely every quarter.
By undertaking regular evaluation of your targets, real benefits will materialise for you as an agency manager or owner. Aligning frequent reporting with financial evaluation provides sound evidence on the operations of your agency that allows you to be proactive in the decision-making process.
One of the key metrics for all agencies is gross profit. Aggressive, ‘go-get’ agencies will ADD any shortfall in actual results against budget to the remaining budget, referring to it as a dynamic cumulative target, and revised forecast.
Here is a working example of how you go about reviewing and revising your gross profit target:
Say your agency annual gross profit target is $1,500,000 and that amount is equally spread across the year at $125,000 per month. This is the amount required to cover your running costs and deliver your profit target.
End July review:
If the actual gross profit for July is $100,000, this means there is a shortfall of $25,000.
So, the ‘go-get’ agency will ADD this shortfall of $25,000 across the remaining 11 months of the financial year, at $2,272.73 per month.
Your new monthly gross profit target for the remaining 11 months will therefore be $127,272.73 (an increase of $2,272.73 per month on the original $125,000 budgeted target).
End August review:
August is a good month and your gross profit was $175,000 which is $47,727.27 ahead of your revised $127,272.73 budgeted monthly gross profit target.
Recalculating the gross profit target for the remaining 10 months would result in a new gross profit target of $122,500. This is calculated by distributing the $47,727.27 you have earned above target in August across the remaining 10 months of the year. So the monthly gross profit target you revised in July to $127,272.73 now becomes $122,500.
As it is early in the financial year and there are potentially still so many unknowns, you may choose to keep it simple and stay with the original monthly target of $125,000. But if you decide to do this, always be mindful of the potential erosion of your profit target!
If not quarterly, then I definitely recommend you re-forecast your gross profit and net profit targets at the halfway point.
To provide a comprehensive evaluation of your business, the review process should also include a number of key drivers that are non-financial (which are likely to have a financial impact on your agency’s operations).
Non-financial drivers, such as human resource issues and global events and trends, will not only provide additional information on your operations, but may also support or explain the financial results during your monthly and quarterly review.
Your General Manager and Finance Controller should be monitoring these targets on a regular basis and reporting at management and team meetings so you are fully informed and able to take action to ultimately meet, or better still exceed, your targets.
Numbers can be tricky. If you would like a complimentary tool to help with your own ‘dynamic reporting’ then just drop me a quick email and I will send you the tool I used for the calculations in the scenarios above.
Remember, something is better than nothing: Set some goals and seriously monitor them – agree on responsibilities and put review dates in the diary!
I hope that the above gives you some clues on how to review and revise your gross profit on a regular basis. However, I know only too well that sometimes the financial side of running a business can be tough, confusing, and at times quite overwhelming. Please do not hesitate to send me a message via Intercom, or pick up the phone and call me – I’d love the opportunity to help, and a quick call might be just what you need.