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Money Matters Making the Future Better By Dr. Alber t D. Bates President, Profit Planning Group M ost firms have put the bleeding of the recession behind them. While profitability is still not back to desirable levels, things are clear- ly improving. The operative phrase in most instances is"cautiously optimistic." If sales, margin and expenses follow the pattern of previous recessions,most firmswill be okay by the end of the year. The typical FEDA member will be far removed fromthemassive challenges of the past two years. On the other hand, they may be equally far removed from optimal profitability. The challenge is that in the euphoria of getting back to "good"many firms will miss the oppor- tunity to make it all the way to great. Based upon that challenge, this report will examine two issues that are impor- tant add-ons to financial planning for 2012: • Business as Usual—A projection of financial performance in the industry based upon a combination of past results and current trends. • Making the Future Better—An examination of how the key factors that influence profitability can be leveraged for improved results. Business as Usual The first column of numbers in Exhibit 1 provides a projection of over- all financial results for the typical FEDA member in 2011. Clearly, there is a lot of 2011 left and a lot of uncertainty still in the economy. However, it is possible to make a reasonable assumption about how the year will end up given 1) cur- rent sales trends and 2) an analysis of performance following previous reces- sions. As can be seen, the typical firm is anticipated to have sales of around $12,000,000 at a grossmargin of 25 per- cent. This should produce a pre-tax profit of $240,000,or 2 percent of sales. This is adequate, but not outstanding performance. This means the profit results for the typical firm are expected to look a lot like they did before the recession hit. The reality, though, is that the pre- recession numbers were somewhat unexciting. Certainly, they are better than the depressed results seen during the depths of the recession. However, they do not represent the profitability that firms deserve. It can be argued that the long-term profit results for FEDA members are in something of a rut. Actual results rise and fall in tandem with economic con- ditions. However, across the business cycle, results always revert back to the norm. That norm has been in place for an agonizingly long time. Interestingly, profit levels have remained somewhat constant despite the fact that firms in all industries, including FEDA, have become more sophisticated. For example, 20 years continued on page 36 Exhibit 1 The Impact on Profit of Greater Control of the CPV's (Critical Profit Variables) For the Typical FEDA Member Income Statement Net Sales Cost of Goods Sold Gross Margin Payroll and FringeBenefits All Other Expenses Total Expenses Profit Before Taxes Increase in Profit—% Projected Results $12,000,000 $9,000,000 3,000,000 1,800,000 960,000 2,760,000 $240,000 Margin Control $12,060,000 $9,000,000 3,060,000 1,800,000 960,000 2,760,000 $300,000 25.0% Payroll Control $12,000,000 $9,000,000 3,000,000 1,764,000 960,000 2,724,000 276,000 15.0% Both Margin and Payroll $12,060,000 $9,000,000 3,060,000 1,764,000 960,000 2,724,000 $336,000 40.0% 34 FEDA News & Views