Developing Annual Projections
Developing Annual Projections
Developing annual projections is not easy but it can be done if you use the right process. This is why today’s episode will guide you through it.
In this week’s Exit Your Way Roundtable episode, our speakers were Damon Pistulka and Andrew Cross. They are the Co-Founders of Exit Your Way. The conversation of the episode started with Damon sharing the topic of this episode. Damon and Andrew help their clients build businesses they can sell or succeed. Developing accurate projections is a big part in building a successful business.
He said that last time they talked about putting strategic plans together, but in this episode, they’re going to talk about how those plans affect your numbers in the near future. Moreover, he also said that in January, they will talk about how to turn these projections into your monthly or weekly tasks.
Download our free business valuation guide here to understand more about business valuations and view our business valuation FAQs to answer the most common valuation questions.
Moving on, Damon shared a presentation with everyone so they can get started on developing annual projections. Starting this conversation, Damon said that the first thing that we have to do in developing annual projections is to focus on the way. This includes the question of why are you doing this?
Further, into the conversation, Andrew said that developing annual projections is in your hands as a team. Moreover, he also mentioned that it is like a crystal ball. This means that when people plan, they don’t understand that they need the data.
Moreover, Andrew added that this means that they need to look back as well while looking ahead. Therefore, according to Andrew for developing annual projections you always have to ask yourself some important questions. These include where did you come from? Why are you doing this? Etc.
Do you want to know if your business is ready for your exit or what you should do to prepare? Learn this and more with our business exit assessment here.
After this, Damon switched the presentation to another window and shared a new slide. With this, he shared all the tips and tricks of developing annual projections. Moreover, he also presented the kind of projections needed.
By the end of the conversation, Damon further elaborated on the projections that you need to use in your exit. The conversation ended with Damon thanking the audience and Andrew for attending the episode.
Get the most value for your business by understanding the process and preparing for the sale with information here on our Selling a Business page.
sales, projections, people, andrew, business, line, year, net income, monthly financials, variable costs, month, company, numbers, exercise, gross margin, cost, historical trend, spreadsheet, talk, understand
Damon Pistulka, Andrew Cross
Damon Pistulka 00:00
to go live in time, so we’re going to do that and then we’re going to get started.
Andrew Cross 00:05
So many rules.
Damon Pistulka 00:07
I know. I know. And I’m not a good rule guy Alright, right everyone. Glad to have you here today for the zero way round table. We’re out here live on LinkedIn. We’re here in remote. We’re gonna have what I think is gonna be fun today. I hope that at least a few of you understand and enjoy it. Because we’re going to be talking about developing annual projections. We had a great conversation with a few people at the table they’re talking about Chris Arrington was talking about Gen Alpha technologies a little bit.
I mean, it is a cool solution. If people haven’t seen it before. Go check them out. Check out Gen Alpha technologies. Good stuff. We got David Chrysler in here today from the Chrysler fellow Detroit guy. Andrew grew up there. long history of being in Detroit. We got Brad and Ron. And if you’re on LinkedIn listening to us, go ahead. Yep. Yep. And he’s got a prize. Miskin hat because last week was a momentous occasion in the Michigan football history.
Andrew Cross 01:16
The most watched Game of the Year short of the Super Bowl. The reading,
Damon Pistulka 01:21
I watched it. I say, I don’t have a dog in the race. And I watched it. But that’s 10
Andrew Cross 01:32
years. That monkey was on our back. So Yeah. Feels a little better now. Yeah. Yeah. Well, then,
Damon Pistulka 01:39
you know, in Washington State, we had a little victory. The Cougars beat the Huskies, which my my family our Washington State graduates.
Andrew Cross 01:48
And my son is a husky. Yeah.
Damon Pistulka 01:52
My son was at the game. He was one of those people that broke the rules and stormed the field. But they had a good time of it. So for him, big football weekend, that’s for sure.
Andrew Cross 02:02
Obviously, he’s not a good rule guy either, then.
Damon Pistulka 02:07
Not so much. Not so much. Yeah. The best in that regards. Awesome. Well, we’re gonna talk today a little bit about developing annual projections. You know, the last time we started, we were talking about your strategic plans, putting together strategic plans. Now we’re going to see how those plans affect your numbers, how they affect your long term, your next year, and really how they tie together into creating your financial projections that in January, and I know, it seems like January’s ways out, we’re going through the financial projection part of this and this, this event. And in a couple of weeks, we’ll do the next one where we’re going to finish the last half of our projections.
And then in January, we’re going to show you how you take these projections and turn them into the weekly what do we call them, operations, meeting production, not production, but business improvement meetings, to really ensure that your teams inside the business are moving towards your goals that you’ve laid out, because they’ve worked with you on these strategic they the strategic plants, so they’re saying,
Hey, we’re going to grow our sales, we got these things that we’re going to do in the operations to, you know, affect the efficiency, you know, we’re going to all the way through your business in the strategic plans, you’ve worked on these now we’re going to take these plans and turn them into numbers.
And then we’re going to take those numbers and turn those into actions in January, and we’re gonna have some fun doing it. And, and well, fun in my world, because this is I think it’s fun, but I think not so much. The fun part about it is but when you are running a business, this is the way to truly get much, much closer, if not achieve your goals consistently. Andrew and I we developed this stuff when we are working in investor on companies out of necessity, because if you if
Andrew Cross 04:08
you go ahead, they made us do it
Damon Pistulka 04:12
well and out of necessity to because if you if you go into if you’re in an investor owned company or a public company, and you go into a board meeting as the CEO or part of the executive team, and you’ve missed the number significantly. It’s not a good thing. I mean, it’s just not and you still so really this preparation is is very beneficial, because what is it? What does it really help to enable enables helping you to achieve the goals that you’ve set out and achieve your goals? So it’s not that we’re just doing this to be doing it? We’re doing it because it helps you achieve your goals and it’s proven that it does.
Damon Pistulka 04:55
without further ado, we’re going to get started on this and we’re going to share a presentation here, but we’re gonna Don’t be flipping back and forth between presentation and and some spreadsheets stuff. Hey, if you got questions just reach out to us after this, we can go through this kind of stuff, we can share this, the spreadsheet with you, anything like that that we’re running through, because it really is not that hard, honestly in about, you know, if you’re if you can get your accounting people to help, they can do a lot of the back work that that gets us ready.
But in, you know, overall, if you fend four to six hours on something like this, you’ve already done the strategic planning with your team, you spend four to six hours on developing these numbers out, you can really change, change the game, change the game and make your projections work. So Oh, we got Nicole and in house too. All right, well, we’re going to get going here. I’m going to share a screen and Andrew and I will get rolling.
Alright, here we are, again, the old familiar. So this is what I always like to put in the front of these is the why? Because if we don’t know why we’re doing something, we should figure that out before we do it. And and really in this case, it’s it’s to give everyone direction. What are we going to do in January? What are we going to do in February? What are we going to do beyond and hopefully at the end of the year, those those actions that we’re doing drive the results are going to be? And Andrew, how have you seen this help when you do this planning and really lay these things out?
Andrew Cross 06:37
Well, I think, you know, the big question is why and I get that a lot. You know, when we work with small medium businesses. Many of them don’t do this. Don’t do this exercise. I think we got a feedback there. Damon, do you hear that?
Damon Pistulka 06:56
I’ll mute mine. Go ahead. No, okay.
Andrew Cross 07:01
But, you know, like Damon said, you know, publicly traded companies. Yeah, I mean, they live and die on their projections, and they have earnings calls, you know, those dreaded earnings calls every month, whether they hit or missed, you know, when stock prices go up, you know, people get bonuses when they go down, people get fired. You know, so we’ve been in that world, I don’t think that’s a great reason why to do it.
But you know, if you’re, you know, if you don’t go through the exercise of doing your projections, to understand where you’re going, you know, you may think you have it kind of in your head, and you’re looking ahead, but because going through this exercise gets everybody else on the same page to number one.
And, and then you know, also you begin to realize to when you lay it out in this fashion and really go through this exercise, you may not do things, you may be doing things that you didn’t realize you weren’t doing, or decisions you were making, when you really sit down and you got to do some analyzing and this isn’t, you don’t need to be a statistician to do this kind of work. And this is kind of why we’ll show you how we work on this. But this is it’s a difficult and it’s a little bit intimidating. To go through this process. And I think that’s one of the reasons that people don’t do it.
Damon Pistulka 08:18
Yeah, yeah, I agree, Andrew, and I like this picture, because it’s kind of like wandering in the desert, without it without a compass, you know, because you’re, and we can do this, there’s there’s a gazillion businesses, I do this for the entire lifetime of the business. And, and, Hey, it’s okay.
But if you’re really want to track to aid to a goal, we all know that you got to write those goals down, you got to move it and this is no different. Other than taking that and putting it down on paper and turn it into reality. So we’re going to get going quest. So you know that the the annual projections are really there to show showing the plan, showing the plan, we got to show everyone the plan, you got to know as an executive in the business, the plan, everybody that’s going to be helping to execute on this plan has has to understand the plan. And it’s key to that.
Andrew Cross 09:10
Yeah. And I think there’s, you know, this isn’t really just a financial exercise, you know, projections are, you know, a crystal ball, but the financial aspect of it, or the accounting aspect of it, you need that data. And I think that’s where a lot of people miss in the planning because they don’t look back. You know, they’re looking forward and they want to plan for that.
They want to know what’s in the next few months, but they don’t look back and really, you know, see how we did. And, you know, when you when you’re involved in a deal or a business or with your bankers, they’re constantly looking at year over year, why do they look at year over year, because they’re looking back to see how we did you know in that same period of time before and going forward? It’s a it’s a very good thing to do in the plan, and it will help you to in your mind make it reality.
Damon Pistulka 10:01
Yep. And David David says missing your numbers when you’re working for a publicly traded company can make for some difficult conversations with a lot of additional explanation required. And that’s, that’s really, that’s the same thing if you’re in a in an investor owned company, and it should be the same thing if you’re in your own company as well, because you should be laying this out. Because at the end of the day, this is what we’re all looking at, what’s our net income going to be for the year?
I love this, because at the end of the day, where are we trying to figure out how much money we gonna make next year. That’s, that’s really what we’re all we’re doing all this work for, we’re putting all this together because, hey, we want to achieve these goals. And we want to make this net income. So it’s, it’s a, it’s a fun little exercise, we’re going to get started here. And we’re going to so we really, as we go through developing the annual projections, I see Kelly’s in the in the house to Kelly Robinson, great to see you. Thanks for being here. We’re going to get going here now.
So where to start. And I would like to start simple. In you pull up the and I know these current current year monthly financials, this is something I pulled up image off, you know, Google or something here, but print out your monthly financials like this, if you got a halfway decent financial program on the backside of your company, you got this, you can print it out then in the monthly format, because this is your starting point. See how you did reflect on that. Andrew, how much? How many times do we do this? And when we’re working with clients to print out their year and look at it?
Andrew Cross 11:34
Yeah, and surprisingly, how many of them don’t look at it this way too. But you know, where you start is where you’ve come from. So I think the starting point, and where I typically what, you know, we work with clients to help them develop their projections, right. So that’s an exercise and it’s good to get other people involved. Don’t just do that yourself, bring in your team, your sales team, even some outside people, you know, to to have a look at us because, you know, projections have to be challenged, and you have to defend them and understand that, but we look back start with the historical trend.
You know, where are your What have you done the last three years, then what have you done the last year by month, you know, see how it’s going, you can forecast on just a straight numerical historical trend. Again, you don’t need to be a statistician to do that. But if you go the way you have been over the last three years, then you start with this is what it’ll look like going forward on a historical trend basis.
That isn’t always accurate. There’s a lot more factors involved about maybe what’s going to happen in the next 12 months, or the next 24 months. And then you but you we have that so that you know that when you analyze and look at the historical trend to start the exercise, then you really understand a little Blyde. How did it how did that happen? Why is it repeatable? Is it going to do it again, and it starts all the discussion in the thought process to really understand, you know where you’re going to go for the next 24 months?
Damon Pistulka 13:01
Yep, so you’re starting with these monthly financials, Andrew does this a lot in our business as a result of a doing business valuations where we need to project what the next year’s are based on historical stuff. We also do it with clients, when we’re doing this exact thing. I’m actually we’re actually with animals, many clients right now doing it. Because this is the time of year that people people come and do this, but it starts was looking at your historical stuff, get it out in the monthly because then we’re gonna take this and turn it into a projection template.
This is not the one this is again, this is a stock image but we’re going to talk about it because you got a projection template you don’t even realize it it’s it’s that that financial, monthly financial, Excel export as you can do from your from your counting software that gets you started.
Now you and I’ll gladly share the the template we’re using here too, because it combines the thing the tabs together because what you want to do is take that and add other tabs to it. You want other tabs, we’re going to talk about direct costs, the sales, the the the staff, and and other things like that we’ll see. But this projection template becomes the heart of what you’re doing, because you can see how changes on a monthly basis will affect the overall profitability for the year.
So we’re going to do something here and then so where do we start, we start again, we’ve got our historical, we’ve got our projection template and we got we’re going to look at three things. First, we’re going to look at sales because we want to know what top line revenue is and now that’s a that’s a taken a look at that and and we’re going to go we’re going to incorporate the strategic planning that you’ve done, you got your historical sales, and then we’re going to go okay, now this is what we put together in our last thing Whatever you’re talking about, what are we going to do in sales for the year?
What are you doing in q1, q2, q3 q4, and we’re going to blend the two together, we’re going to say last year, if we sold a million dollars in the first month, in the second month, the third month or whatever, what’s changing? Have we added clients that we lost clients? What’s changing in that? And and what are we doing that’s going to affect it positively? Or what’s really happened? So you didn’t go through? And you start with sales? Because that’s where it, that’s where everything starts in the businesses, if you’ve got how much money is coming in? Now, Andrew, how hard is this for for some people to really do?
Andrew Cross 15:37
The hardest thing? This is it? I mean, if you can, you know, you know, are you looking at a crystal ball and just throwing darts at the board on your projections, you know, but if you can, you can figure out the top line, if you can get, you know, close within it 10 plus or minus degree of accuracy on on your sales part, the all the costs, the fixed costs, the assets, the capital expenditures, and everything else, we can we can figure those out. So, my focus, typically when I’m working with clients is really spend the time on that top line projection.
And, and again, I think that this is, this is the hard part. And I get a lot of blank stares. When I asked that question about what do you do with so we try to make it easier and try to understand what are you going to do this week? What are you going to do by the end of the month? And then we’re pretty highly confident, what’s your level of confidence in that? And then what are they bought at the end of the quarter? in it? Let’s you know, let’s go out from there, have confidence decreases the further out you go. And that’s natural.
But then we come back and start asking questions, you know, and that’s what you really need to do in this exercise is, is do that too. But I think one of the reasons that people fail at this, and it is done badly often on as they go forward six months, and then they realize how much they miss by? Yeah. It’s not just screw it. This is impossible. Yeah. Right. But it’s where you turn your projections into your plan. And, you know, it’s it’s not just, you know, you know, and then you’ve got to have different levels of projections, some are more of a reach, and some of them are static. And then your plan prepares you to sort out what those costs are.
Damon Pistulka 17:21
Yeah, well, and this one you’re putting together. Yeah. And David talks about being realistic about setting your sales projections, looking at the history, looking at what’s going on market conditions. And he and he talks about one of the things, David’s here that I want to make sure of too, as we’re going into this, you got to have your sales team involved, your sales team is going to commit to these numbers, they’re going to commit to these increases. And you’re going to sit at that table, and you’re going to say, Listen, if you’re going to raise sales by 5%, next month, and that’s going to carry through the rest of the year because of this effort. You’re going to be held accountable for that.
Andrew Cross 18:01
Yeah. Well, another aspect of it too, is it really helps your sales team really focus in on what the goals are. And there’s their buy in, right. So if they’re looking, if you look back, and you say, Okay, we had 15% year over year growth from last year, but what happened, okay, in July, we added this new channel, and look that’s really attributed to that growth. And then you project forward into that, too, we’re going to add another channel, once the sales teams realize the impact of that, right?
Oh, wow, that’s not that hard. And they’re not going to spend all their time doing, you know, low, low margin kind of kind of busy work, they’re gonna go, I’m gonna get one of those new channels, right? Yeah. Yep.
Damon Pistulka 18:41
And David mentioned one other thing that we’re going to show show in just a second here, because we’re going to go a little off road here. And we’re going to switch switch while we’re sharing. And I’m going to share another window here, because we’re going to go into these projections. And we’re actually going to start to look at this thing. So that that we can do this. Now one of the things that we like to do in ours, and you can see we have we started our our projections here, with the with the planning tab.
This is the planning tab that I was showing in there before and these these plans are in the same spreadsheet so we can refer to them. But then, as an I keep going, I’m clicking on the tab in the damn projection, but in the presentation, but here we go.
Here we have our sales with sales by month, you look at this across the top January through December, what are my sales and this is a company that that has ecommerce channels, direct sales channels, all this. You just go in here and you’re gonna say, okay, my sales for January is 100,000. And like Andrew and David both talked about, so what happens? I’m going to do something in February, it’s going to raise my sales by 4% or I’ve got a new project. I know this customer is going to be increasing their sales because of different programs.
You go through this with your major customers again at 20. rule, you will get so darn close on this, if you do what David’s suggesting what Andrew talked about, you won’t believe it, if you do this, because I’ve seen people in $50 million companies spend two hours with their salespeople doing this. And they’re in there people that are close to the customers and get within 5% on 12 months. And if you do that, that is where you really get the power from this. Because as everyone’s talking about, you can then talk about all the other things that happen because of this and plan your business out because of it. Yeah.
Andrew Cross 20:39
And I think to what you really find out is that’s your resource, right? They’re the salespeople. They know what’s going on. Right? So they’re they have the answers, can we hit this target? Can we add that channel by Yep. First quarter, you know, and listen, you know, they once in a, once they feel they’re part of that process to you know, they’re, they’re gonna go out and own that.
Damon Pistulka 21:02
Yeah. And this is, this is what I always liked. Because when you get these, these people, and this is not just sales, this is their, your, if you got production operations, developers, whatever, this is where the rubber hits the road, because they’re committing to this stuff. And you need to just remind them of that, it’s like, listen, we know that you may not get it all the way we want you to, but we have to set the goals high enough. So we really are going to have to, to to put in our best effort to achieve them. But this is where the rubber hits the road.
Because if you say you’re gonna do a million, a million dollars in sales in a month, hit the million dollars, do what it takes to hit that million dollars. So when we start to talk down the list, we’ve developed the sales now you really got to go, okay, what are my variable costs. And in companies where you your variable costs are the major variable costs, there’s, there’s really not much different. When you look across companies, is there Andrew, when you look at the variable costs, they’re pretty simple. And they they are basically into three or four categories.
Andrew Cross 22:04
Yeah, but you know, like I said, you can back in to those numbers, look back historically, go forward to your top lines training, and the major indicator to look at is percentage of sales. Yeah, sales go up, your variable costs are gonna go up, you know, and you need to be prepared for that to our cash flow basis. Yeah. Because you need to be able to support that you got to support sales, but you need to be really looking at those numbers and look at them as a percentage of sales and then look outside, go to benchmarking, there’s services that can do that, as people that can provide benchmarking data and figure out to if your, your, your expenses are falling in line with your peers.
Yeah. Because you’ll identify opportunities there. Because again, the it’s the net income line at the bottom, that where it all flushes out. So the we’re focused on the top line, we figure out what our fixed and variable costs are, but it’s really how it affects the net income. So then that’s the exercise. It’s it’s really understanding what have I got to work with you on the budget side? Yeah, going forward if sales are here, so it’s really imperative that get those top line numbers correct there as close as you can.
Damon Pistulka 23:19
And you hit it, Andrew, look at your historicals because if you’re if your historical cost in in materials, direct labor, sales costs, indirect labor, any of these, there, your indirect labor is not quite as variable. Some people it’s more of a variable cost. But we’ll we’ll talk about that in a minute and how we like to do it. And when you meet in that, hey, I want to first of all say we’re not accountants, we’re more functional people that deal with these numbers, numbers, blah, blah, can’t talk. But you need to know what these variable costs are.
Because as a person, these are typically as a percentage of sales over the course of a year, this is what you’re going to spend. Now, these are the major ones we’ve hit material labor, and your direct direct labor and your sales costs but there could be other ones too. And we’ll we’ll see those when we go in the next one. It could be your your animal advertising spend or other things like that.
So we’re just talking about things that are generally above the gross margin line here now and and indirect labor as I put it in here, it’s not a variable cost, but it’s usually above the the gross margin liner is or isn’t depend on the accountants are doing it, but I did it in there for talking about that today. So we’re going to quickly go off road again, and I had to put these on because if you don’t know what these motorcycles are, this is a BMW G 1200 adventure. It is the coolest motorcycle you can ever have.
I’m just no I’m a goofball. But if you If you’re a motorcycle person, that’s the one to have, just go buy it if you’re buying one. Alright, so when we took down, we’re looking at sales. And again, this is a spreadsheet that has multiple tabs connected together. So if I make a change here and sales, it updates my my profit and loss that oh magically, my profit and loss, it’ll update my income lines, as I adjust my my direct costs in here, which we’re going to look at are my variable costs, my variable cost that I was talking about in there are the materials labor, sales, whatever you got, adjust these things around.
Because if you know, per sales channel, if you’re doing kind of E commerce things, if you know, per customer, or just if all your stuff is the same, just set up one of these for your sales, so that you can be adjusting this on an annual basis. Because if something happens in your materials are inflation like now, last year, in manufacturing, the price of raw materials just went through the roof. Right. So are you including the the effects of inflation and other things? That’s a big one, isn’t it? Andrew, this time?
Andrew Cross 26:05
It certainly is now. And, you know, you always I think that’s just part of it is you need to factor in some sort of, you know, it, you know, you have to have your assumptions. And you got to challenge those assumptions all the time, too. So there should always be an escalation and expenses, on forward, even a standard three to 5%. Straightforward escalation of expenses. And you know, if this is an unusual year, because we’re probably past that, we’re probably going breaking, you know, your standard escalation costs. Well, and
Damon Pistulka 26:38
some of these people are seeing, you know, 30% increase in raw materials. Well, what’s that do to my 27%? Well, I gotta go, what’s 27% times 1.3? You know, to get what my new percentage is going to be? Can I and this is where you have to look at this in regards to your sales, my costs for materials or labor have gone up?
Are my sales going up? Or is it causing me to have a reduced gross margin? These are the things that I mean, this is the part that really gets into because because below this line, your this is where you generate the cash for the business. Because below the line, it’s your fixed and the other stuff, that little bit of variable stuff, and but we’ll talk about that in the next one. But this is very important to spend the time to think about these things. And these categories of your, of your variable costs, that will that will be doing that.
Andrew Cross 27:33
And this, this comes back to pricing. This is a pricing exercise. Yeah, it is, once you lay this out, and you can see what’s going on here. You don’t want to find out your pricing wasn’t right. Yeah, at the end of the year, you want to find that, you know, you want to start looking at that, too. And you may, you know, they may be retiring some product lines and trying to develop new ones. Yeah, moving around. You know, so those decisions are made. At the beginning, you know, before it’s too late.
Damon Pistulka 28:04
Yeah, if you’re, if your systems are good enough to give you this information by customer, that’s awesome. By channel, it’s incredible. And again, this is taking these numbers by these different channels. And and what we’re doing in this spreadsheet is we go down here and we calculate all the the monthly based off the sales that we put in our in our sales by month. Well, I keep clicking on the wrong thing, sorry.
We click on the sales, if I change the sales in any one of these per month, it’s changing the it’s changing my variable cost these variable costs then update our profit and loss statement. So if my materials go up, then right here, my materials Lana go up in the in the month like I should, this stuff is not hard for your accountants to set up, or, you know, someone that’s got that, that can do this for you, you get the people working together.
Andrew Cross 28:57
Well, one of the one of the things to understand here, and this is quite important is, you know, your accountants, you know, this is not a bookkeeping function. This is no, this is a, this is a CFO function, which is again, like Damon was talking about where, you know, we have operate operational accounts, but small medium businesses generally trying to blend those two positions together for typically, you know, they don’t really have the resources to have CFOs are expensive, right? But, you know, these are something to look at, but you have to be able to do that.
So make sure you understand that bookkeepers function is just to report the score and help you set these things up and get you the data cheap the data up to date. But you know, as far as having them make strategic decisions, or looking forward, you know, as far as those kinds of things go, you or your CFO, you need to you know your team need to work on that part. Yeah, to get
Damon Pistulka 29:51
Yeah, and you you if you don’t I mean, obviously in some businesses if you don’t have the CFO, it’s gonna be a combination of everyone. You may need some outside It helps to do a little bit of this but but the the exercise in and of itself is great because as you’re doing this and Kelly goes is this is this Anders comp and or an X company? But no, it says a blender like 100 companies right that we’ve done this before. So that but as you’re doing these things, and you’re down over here, I’m going to the far side over here where we’re looking at the the 2022 total.
What this is, does all these changes that you’re making to this goes again and goes, Okay, I look at this is my year total. And again, I’m looking at every single change I’m making, I’m coming back here and I’m looking at what’s how does that affect my net profitability for the months themselves and the year in total? And this gives your you’re working through this because as Andrew said, you don’t want to get here. Get halfway through the year. All the motorcycle pick they call that’s more psycho pick. Nope, I that’s the one I wanted. That’s not the one I get get. But I’m getting
Andrew Cross 31:06
a different one. Christmas is coming. And he’s been a good boy this year. So
Damon Pistulka 31:10
yeah, yeah. Yeah. No, I get one that’s a little different.
Andrew Cross 31:16
So, you know, um, yes, we we talked about, you know, we really worked hard on the forecast the projections looking in the crystal ball. We worked on the numbers, but the key word here, Damon is talking about scrutinizing, you know, scrutinize your expenses line by line by line, you know, because, yes, you know, we change that top number fixed. Variable costs change as a percentage of sales, fixed costs are kind of what they are.
And maybe they are, you know, you go if you go down and scrutinize those lines, not only early, but then again, on a regular basis, either it’s monthly or at least quarterly at a minimum. If you look back at the history, you’re going to identify opportunities. Yeah. To reduce those expenses were do something different. Yeah. Yeah. And that’s nice scrutinize?
Damon Pistulka 32:06
Exactly, exactly. And when we when we, when we do this stuff, it’s, it’s really about, you know, you’re talking with your team, you’re asking your, you know, if you got purchasing people or you know, the materials are going to change, or how your labor is going to change, you got to, you know, your new hires are costing you 25%.
More, that’s another thing that’s hitting every single company now as the, the, the labor is costing more, but are you able to offset with you looking at your operations team, this is, again, like your strategic planning, you have to go through this with your team, even if the team is you looking in the mirror, writing down the numbers, you got to go through this and really get get, get comfortable with the fact that it is going to is going to turn out that way.
So I’m going to quit sharing this again, we’re going back to the presentation. And yeah, that’s, that’s where we’re at with that we’re gonna get through this quickly, because we will end up like we said, so we come in back into this thing. So we’re going down to that gross margin line on these on these and if you gross profit, gross margin, there’s different different, I think margins, the percentages and that Andrew and profit is actually the dollars or something. The actual thing? I don’t know, I just know, there’s no
Andrew Cross 33:20
gross margin is after Cost of Goods. Yeah, basic variable costs are mostly Yeah, yeah, area. And then net income. You know, it’s at the very bottom below your administrative expenses. Yeah. But there’s also, you know, there’s a, there is a, there is an outside little factor in here that people you know, often overlook in their budgeting exercises is capital expenditures. Yeah.
Damon Pistulka 33:47
Talk about that next week, because you got to understand how you’re going to pay for what you’re doing. And that doesn’t necessarily come off of your profit and loss statement in your financials. So
Andrew Cross 33:57
it’s, it’s a big domino number often, Yep, yeah,
Damon Pistulka 34:01
off your total cash flow, that’s for sure. So really, what we’re looking at here is, is again, we’ve got the sales at the top, and we’re working our way down through the cost of goods.
And we’re getting here to our gross profit line, gross margin line, whatever you want to call it, because this is the cash you’re generating every month to pay for all of your fixed costs your your executives, your every other thing that’s not included in the variable cost of producing whatever it is software, you know, it just really doesn’t matter what you got in your variable cost or what you’re producing. It’s the same kind of thing. And when we look at this, so we’re going to go down through here. Oh, we’re getting close to the end. Whoo, we’re gonna finish on time.
Andrew Cross 34:46
Damon Pistulka 34:47
promises promises Well, this is awesome because what I wanted to do them
Andrew Cross 34:53
just quickly on gross, you know, gross margin and net income and you know, again, why do we do it this way? It’s not just an Counting function, but, you know, again, back to the buyers, you know, think about it from the buyers perspective, they want to know what your profit margin is that they’re very interested in gross margin,
Damon Pistulka 35:10
yeah, if you’re getting ready to sell your business, this is something that everyone will be looking at. And getting onto this,
Andrew Cross 35:15
this, this, this will if you have this, and you have this on paper and you have, you know, you have a data old data that you’ve looked at, and you’ve new data and you’ve adjusted, and you’re actually meeting your projections, the value of your company will go up, because this is the buyers. first thing they’re going to ask is, you know, what do you think, you know, what do you what’s the future, like here in the next 12 months, if I buy this company, that’s the first thing they’re gonna want to know.
Damon Pistulka 35:40
Yeah, and especially if you are, if you’re in that, if you’re in that cycle of, of, I’m going to be either preparing my company to sell or in the process of selling my company, having your annual projections, and then meeting those projections is is like gold, it’s like it’s printing money for yourself, when you’re doing this. Even though you’re years ahead of this doing this gets you in the in the right frame of mind going through this, the first year, you might be rough at it, I can guarantee you, if you do it a second year, you better be will be will be rough at it, the second year, you will get much better.
But as when you look at this gross profit line, and you really look at these things, and you you notice that the different percentages, always look at your variable cost percentages, and make sure look at the big ones first, like in this example, materials are my biggest costs, if I have a month raw materials is normally running at 28%. And for some months, it’s 35%.
What the heck happened. This because that just dropped, you know your gross margin is going to drop or your materials and direct labor are the things that are biggest and this, those are the key things that when we talk about that in January, we’re going to talk about why it’s so important to be tracking your cost side of this to make sure that you’re you’re tracking to this on a weekly basis.
Because something like this, you can you can easily go five, even 10% over on this on costs, well, that’s 40 or $50,000 a month, on on materials and that you can do that. And if you’re not tracking that and understanding what that is, but before you know it, my margin won’t be 35% It’ll be 27%. And when you look at your net income, my net income for that month, we were thinking it was going to be 12% on that means now it’s four it changes things an awful lot.
So here we go. So we wrapped up in 845. Andrew, nice, this is good. Well, a I want to thank everyone for being here next time. So we’ve covered this down to the gross gross margin line we’re gonna stop on on LinkedIn live, because what we want to do is we want to take take some time with the people here and Remco and talk about a little bit, we’re going to stop sharing here, and we are going to be back in two weeks, we’re going to finish this, what we’re going to do is we’re going to say okay, now we’ve got the gross margin line, we know where we’re at there.
Now we’re going to talk about your fixed and variable expenses. And looking at these things, and how that affects how again, as Andrew said, how scrutinizing and looking at each one of these and how they’re going to change and your overall indirect and your overhead labor as well. And some of the ways that we use to adjusted in that spreadsheet again, we’re going to be looking in our in our projection spreadsheet again. And and how that can help you get down to that net income for next year. And really understanding it better. So, Andrew, yeah, final thoughts on getting your gross margin, right?
Andrew Cross 39:01
This is the the end of that’s part two of the three part series so yep, yeah, we’ll just say this is it this is you know, it’s looking at the detail looking back why what happened to happen and to keep that cycle going, and you learn don’t be intimidated by it. You’re going to be off everybody does but you get better and better at it if you can. You can do this skill with your company and like I said get it within plus or minus 10% accuracy. You’re adding gonna add zeros to the value of your company.
Damon Pistulka 39:36
Yeah, yep. And I would say Mark scrub Manti on on LinkedIn there he’s got some I’ve only got two screens I need to get three or four I guess I can get more things going in here. But he was at he was talking about the more you can demonstrate predictable profitability, the higher the value of your company is that is 100%. If you can be doing this for two or three years in a row before you sell your company. It’s like grant money. Because if you say you’re growing 25% and and you’re tracking towards it, and you’ve done that before, it is it is like printing money, they will believe it because you’ve proven it. And you’ve shown exactly how it’s being done.
Andrew Cross 40:15
So just just like the stock market, they have, they have to do their projections because you’re not going to you’re buying the stock based on that. They do buy in the future earnings. And if they make they’re they’re talking about their targets and the stock just keeps going up. That’s just how it works. Yeah, you can make it happen even if you’re a small or medium business. Yeah,
Damon Pistulka 40:36
yeah. Yeah. Awesome. Thanks Mark for that on LinkedIn live there and the others are listening. We will be back again in two weeks there. We’re dropping back in here on remote to talk to people that are in the room and finish up. Thanks, everyone.
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