Is Your Stragic Plan Working?
When looking into which strategies work best for your business, you need to include many areas of your Business Operation. These range from: marketing; sales; human resources; customer service; training; financial analysis; through leadership skills. The process can be a daunting one when you look at it as an overall plan. The key is to break it off piece by piece. Focus on one area at a time until you have completed every one. While we could never address all the areas in this article. Instead, we will address the foundation of strategic business planning, the business model.
Before any formal strategy can be created and implemented the Business Model must be created. Fortunately, the basic model for any business is the same, from a hotdog stand to General Motors.
BUSINESS MODEL
Your Business Model is simply a map of how you generate your revenue. The map is based on the following:
1. Leads – the number of potential buyers who inquire about your product or service. It may come from a phone call, a shopper, an e-mail response, letter, etc.
2. Conversion Rate – This is the percentage of prospects who become customers.
Multiply the two and this equals the total number of transactions for the year for your business.
3. Average Sale Size (in $) – Some people spend $10, some $30… This is the average dollar sale of a single purchase.
Your Total Revenue is simply the number of transactions per year multiplied by the Average Sale Size.
4. Profit Margin – Everything you sell has a cost. The Profit Margin (or Gross Profit %) is what the business actually makes on the sale.
Your Gross Profit is simply Revenue x Profit Margin .
5. Fixed Costs – also called General and Administrative costs. This is what it costs the business to operate whether or not they have any sales. This includes utilities, rent, administrative salaries, etc.
Net Profit is your Gross Profit less your Fixed Costs.
To give you an overly simplistic example, let’s say you are open 300 days a year, and you have 20 prospects per day. That is 6000 potential customers/clients. Then say you convert 1/3 of them into customers. That is 2000 customers. Say your average dollar sale is $100. That equals a Total Revenue of $200,000. Let’s say you make a 30% margin on the sales. That leaves a $60,000 Gross Profit. If your overhead is $1500/month, that leaves you a $42,000 a year profit. Your strategy will dictate how you get here and where you will go moving forward.
The information that goes into this model is very different for every business and includes many pieces and nuances. The key is to have accurate information going in. If not, your best laid plans included in your business strategy will never get you where you need to go - the success of your small business depends on it.
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