"Begin with the end in mind". You may know this as the second habit in Steven Covey's book, "The 7 Habits of Highly Effective People". Did you know it's also the power behind the 'reverse' income statement?
When crafting your business' 2011 goals, don't start with a sales target. Instead, establish your profit target first. Then use the 'reverse' income statement to figure out what business activities are required to meet the target.
You may hate reading accounting reports, but the 'reverse' income statement ("RIS") is one tool you'll love using. It's not a traditional profit and loss statement like the one your accountant prepares.
Instead, you construct a RIS using only the 7 levers that drive the bottom line of every business. These 7 levers are only things you'll need to ensure that you'll meet your profit target:
- # of new business leads
- % of leads that result in a new customer
- % of prior customers who purchase from you this year (customer retention)
- Average sale amount
- Number of transactions/year per customer
- Gross margin %
- Fixed cost amount
In 2010, Turicum Dental Associates turned a profit of $47,885 after all fixed and variable expenses, including the dentist's/owner's salary. Turicumt wanted to develop a plan to grow its 2011 profit to $85,000. Enter the RIS.