2019 Budgets and Key Performance Indicators
By Thad Whittenburg
It’s that time again (if you are on a calendar year) to start the budgeting process for 2019. Here are the topics that I want to discuss that pertain to this process:
- Sales Growth
- Blended Margin
- Expenses as a percentage of sales
First and foremost, budgeting for sales, margins and expenses is key to having a strong financial plan for the coming year. I recently did a seminar at a NARI event and a question came up about what kind of growth a company should plan on for next year. I think it’s always wise to be conservative and not plan for more than a 5% increase in sales unless you’ve landed a big customer/project, or you’ve added more salespeople to your team. There are several reasons for this guideline.
- In October, private builders reported that new orders declined by 11% year over year.
- There has been a 2% slowdown in remodeling
- Interest rates will probably continue to increase which will have a negative impact on both new construction and remodeling.
The second reason I like the plan for a smaller increase in sales growth is that your expense model should reflect a very obtainable goal sales wise.
Let’s move on to margin planning. I have included a guideline on margin blends and how K & B businesses need to focus on what is going to have the biggest impact on their margin. Here are 2 examples of how we changed margins and its impact on the overall margin blend.
Looking at Example 1, (the highlighted items are the ones we’ve changed) it had a much larger effect on raising the overall margin blend. (1.5 margin points) In example 2, we raised the margin by 5 points on lighting and plumbing which had very little impact on the overall margin blend because the sales were not as high in these categories. (.2 margin points) And please, let’s always talk in terms of margin and not mark-up.
Lastly, I am a big proponent of lowering your expenses as a percentage of sales. There are 3 ways to do this:
- Growth in sales lowers your fixed expenses as a percentage.
- Productivity gains- Increase your GMPP (gross margin per person) which will bring down your largest expense of direct selling cost(DSC).
- Reduce your expenses like marketing down to 1% of sales or outsource delivery if you haven’t already. These are just 2 examples but everywhere you can bring down your expenses is a plus. (just 1-2% all trickles down to your Return on Sales)
Just to clarify, the difference between sales growth and productivity increases comes down to this:
Sales growth can be caused by adding more salespeople to your team. Productivity growth comes from growing more sales with your existing team. This means your GMPP is increasing which is the most important aspects of your business.
The last thing I want to touch on is having a clear understanding of your Return on Sales (ROS) goal. The math is easy, and it goes like this:
If you are currently at a loss, break even or 1-2% ROS, maybe your goal should be 3-4% next year. Short term, 5% ROS should be the minimum amount to your bottom line with a long-term goal of being 7-10%.
Next week we will focus on Key Performance Indicators that you will need to have in place so that you can see if you are on track with the most important elements of your business.
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