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Bridging continued increase its sales by 38.9 percent, also from internally-generated funds.With a 20 percent ROA, the results are even stronger, reflecting the potential for a dramatic 51.4 percent sales increase. The assumptions in the model can be debated at length.What is not open to debate is the fact that high-profit firms are building a financial base that has the potential for supporting much more rapid sales growth in the future. It rep- resents the ability to slowly crowd the typical firm out of the market. Making Desired Profit a Reality The clear challenge for the typical FEDA member is to get on the positive side of the profit divide. There also needs to be a sense of urgency to do so. Every year the divide exists, the diffi- culty in catching up increases. Making the improvements in profit performance will require two different actions.The first is that traditional budg- eting procedures need to be over- hauled. The second is that the firm needs to refocus on the things that real- ly drive profit. As strange as it may seem, firms need to stop budgeting.Well, thatmay be a lit- tle strong.They need to stop budgeting theway they do nowand start over in an entirely different format. Budgeting, as practiced traditionally, is overwhelming- ly a top-down process. A firmstartswith a sales plan, tries to improve its gross margin a little and control expenses effectively. After that, profit is "budget- ed" by subtraction–gross margin minus expenses must equal profit.There is no attention paid to what the firm's profit level should be. Instead, profit ends up being what is left over. Such a conven- tional approach does nothing to help the firm reach its full profit potential. The only budgeting approach that works is Profit-First Planning or PFP. It starts with setting a profit goal, then working backward to determine what sales, gross margin and expenses must be to support the profit goal. PFP is a management process. It is not a finan- cial process and it certainly isn't an accounting one. Management must determine how much profit the firm 30 FEDA News & Views26 FEDA News & Views A Managerial Sidebar: This Isn't as Easy as it Sounds One of the challenges with being on the wrong side of the profit divide is that the changes required to get to the right side may be rather dramatic in nature. This is why traditional, top-down budgeting is ineffective. It doesn't directly address what needs to be done. The following exhibit indicates the sort of changes that are required for the typical FEDA member to move from typical to high-profit. The gross margin scenario assumes that all of the profit improvement comes from enhanced margin efforts. The payroll scenario assumes that all of the improvement is generated from payroll control. Finally, the mixed scenario produces half of the improvement from gross margin and half from payroll. The magnitude of the required improvement suggests that the profit divide cannot be overcome in one year. It also suggests that if it is to be a multiple- year plan, then efforts must be started today. Making the Leap to High-Profit Performance Current Income Statement–$ Net Sales Cost of Goods Sold Gross Margin Results Expenses Payroll and Fringe Benefits 1,875,000 All Other Expenses Total Expenses $12,500,000 9,437,500 3,062,500 Profit Before Taxes Income Statement–% Net Sales Expenses Payroll and Fringe Benefits All Other Expenses Total Expenses Cost of Goods Sold Gross Margin Profit Before Taxes 2,862,500 $200,000 987,500 100.0 75.5 24.5 22.9 1.6 15.0 7.9 Scenario Margin $12,500,000 8,978,100 3,521,900 2,862,500 $659,400 1,875,000 987,500 100.0 1.8 28.2 15.0 22.9 7.9 5.3 Gross needs to generate. It also is up to top management to identify in clear and precise terms the specific actions that have to be taken to ensure that the firm reaches the profit goal. After the overall plan is in place, the nitty gritty details can be left to the accounting staff. However, top manage- ment must lead. The phrase "my accountant handles the budgeting" must be removed from the lexicon. Focus onWhat Matters In every business there are lots of things to worry about. In a world in which an extensive support staff no longer exists, more and more of the things to worry about fall to top man- agement.The result is thatmanagement frequently sees a lot of trees and no for- est. Management needs to step back and re-think the level of emphasis it places on every aspect of the business. In that re-thinking process, two factors must come to the fore–gross margin and pay- roll expenses. I've harangued about gross margin and payroll in previous articles and will not duplicate those continued on page 33 Scenario Payroll Scenario Mixed $12,500,000 $12,500,000 9,437,500 3,062,500 9,207,800 3,292,200 2,403,100 $659,400 1,414,600 987,500 100.0 75.5 24.5 19.2 5.3 11.3 7.9 2,632,800 $659,400 1,645,300 987,500 100.0 73.7 26.3 13.2 7.9 21.1 5.3