So far we have identified a number of key areas that you should be looking at when developing your plans for next year. To summarize:
1. Determine the business climate going forward
2. Identify your most likely base sales figures
3. Plan for the development of new products
4. Look at opening new markets, particularly in the developing world
5. Plan on defined cost reduction programs, including purchasing targets
6. Identify any missing cost-control procedures
7. Include plans for people-motivation activities
The final elements you need to plan are:
8. Identifying your high-potential people needs
9. Eliminating the low-margin products
10. Capital expenditures
11. Contingency planning
Identify and reward your high-potential people. One of your key jobs as a manager is to either find these people in your organization and bring them forward or hire them from the outside. If you have shortages of these people, your plan must identify locating them and getting them on board. Many good people have been caught up in the high unemployment wave. Now is the time to find them.
One of the greatest opportunities to improve your gross profit margin is to get rid of your low-margin products. Either reduce their cost or replace them with a new product. If the market for that product has declined, then get rid of the product entirely.
Only by updating old equipment and processes can you hope to keep ahead of the competition. You must identify specific plans for capital expenditures that will result in fast paybacks from increased profits. Your investment in capital projects must be at least equal to your depreciation rate. In good times, it should exceed that rate.
There are a number of ways to determine the future value of a current expenditure. One way is to calculate the value of an asset at any given time relative to its purchased cost as a function of the life of the equipment and the current interest rate.
A = Asset value at any given time
P = Purchase cost (use $100,000)
n = number of useful years (use 5)
i = yearly interest rate (use 3%)
A/P = i(1+i)n/[(1+i)n-1] = 1.125
This means that the asset value each year of its life is more than the present worth at that time, a good result. If the interest rate increases to say 8%, then the A/P value drops to 0.25, not a good return. At 8% the ratio is > 1.0 if the useful life is only one year.