how to react to trends

bonus: charts that put data into perspective.

by ed mendlowitz
77 ways to wow!

getting the information is useless unless it is used!

that is why trend analyses work – they involve a short, easy and quick way to absorb and to react.

more: where is your firm in its lifecycle? | wow clients with trend analysis | 26 ways to wreck a financial projection | three ways to run a break-even analysis | price not always the top consideration in a sale
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trends are always present – but they need to be recognized and uncovered to be of any use. and then that knowledge needs to be used to change what is being done.

it is important for the business owner to understand that there are choices. doing nothing is a major choice and carries with it the natural consequences of that path.

one method of illustrating the “do nothing” alternative is to project the business’ current operations and trends.

illustration: the “do nothing” scenario

following is an illustration of a “do nothing” scenario for bt manufacturing company.

when you look at the projections keep in mind that this is a good business. it is increasing its sales annually and is profitable.

 

bt manufacturing company
income statement summary – years 1 to 11
assumptions used:	% increase per year
sales	3%
cost of sales	4%
operating expenses	6%
# units sold	0%
(in thousands except price per unit)
						current year
	year 1	year 2	year 3	year 4	year 5	year 6	year 7	year 8	year 9	year 10	year 11
	actual	actual	actual	actual	actual	projected	projected	projected	projected	projected	projected
sales	$4,000	$4,120	$4,244	$4,371	$4,502	$4,637	$4,776	$4,919	$5,067	$5,219	$5,376
cost of sales	2,400	2,496	2,596	2,700	2,808	2,920	3,037	3,158	3,285	3,416	3,553
gross profit	1,600	1,624	1,648	1,671	1,694	1,717	1,739	1,761	1,783	1,803	1,823
operating expenses	1,000	1,060	1,124	1,191	1,262	1,338	1,419	1,504	1,594	1,689	1,791
officer’s salary, pension, perks	300	300	300	300	300	300	300	300	300	300	300
net income before taxes	$300	$264	$224	$180	$132	$79	$21	($42)	($111)	($186)	($268)
# units sold	200	200	200	200	200	200	200	200	200	200	200
average selling price per unit	$20.00	$20.60	$21.22	$21.85	$22.51	$23.19	$23.88	$24.60	$25.34	$26.10	$26.88

 

the above business has “settled” into a niche and the owner has become somewhat complacent, not wanting to “upset the apple cart” with any kind of changes.

at 200,000 units per year the business is not losing unit sales, but if it is in an industry that is growing, then the company is losing market share.

additionally, the costs of sales and operating expenses are increasing at a faster rate than the sales. projecting the operations forward five years shows a loss on the horizon. left to its own equilibrium or inertia this business will run itself out.

the final result will be loss of income, assets and value, and a succession possibility.

now, what about businesses whose sales have dropped or who had a really bad year mixed in somewhere in that 10-year period?

following are two graphs depicting data shown on the above income statement summary. how much other information does anyone need to understand that the company is a loser?

peeling away layers of an onion

defining profits for a manager, in tables and graphs

 

1st look
	20x1	20x2	20x3	20x4
sales		4,050,000	4,657,500	5,497,875
% increase			15.0%	18.0%
cost of sales			2,750,625	3,009,656
%			59.1%	54.7%
gross profit			1,906,875	2,488,219
%			40.9%	45.3%
operating expenses
overhead and admin expenses			1,348,200	1,415,610
selling costs			501,525	648,101
total			1,849,725	2,063,711
net income			57,150	424,508

 

2nd look – added 2 years
	20x1	20x2	20x3	20x4
sales	3,600,000	4,050,000	4,657,500	5,497,875
% increase		12.5%	15.0%	18.0%
cost of sales	2,370,000	2,542,500	2,750,625	3,009,656
%	65.8%	62.8%	59.1%	54.7%
gross profit	1,230,000	1,507,500	1,906,875	2,488,219
%	34.2%	37.2%	40.9%	45.3%
operating expenses
overhead and admin expenses	1,200,000	1,284,000	1,348,200	1,415,610
selling costs	330,000	400,500	501,525	648,101
total	1,530,000	1,684,500	1,849,725	2,063,711
net income or loss	-300,000	-177,000	57,150	424,508

 

3rd look – separated by products
	20x1	20x2	20x3	20x4
product a
sales	3,000,000	3,150,000	3,307,500	3,472,875
% increase		5.0%	5.0%	5.0%
cost of sales	2,250,000	2,362,500	2,480,624	2,604,656
%	75.0%	75.0%	75.0%	75.0%
gross profit	750,000	787,500	826,876	868,219
%	25.0%	25.0%	25.0%	25.0%
operating expenses
overhead and admin exp – allocated	1,000,000	998,667	957,417	894,207
selling costs (7% of sales)	210,000	220,500	231,525	243,101
total	1,210,000	1,219,167	1,188,942	1,137,308
net income	-460,000	-431,667	-362,066	-269,089
product b
sales	600,000	900,000	1,350,000	2,025,000
% increase		50.0%	50.0%	50.0%
cost of sales	120,000	180,000	270,000	405,000
%	20.0%	20.0%	20.0%	20.0%
gross profit	480,000	720,000	1,080,000	1,620,000
%	80.0%	80.0%	80.0%	80.0%
operating expenses
overhead and admin exp – allocated	200,000	285,333	390,783	521,403
selling costs (20% of sales)	120,000	180,000	270,000	405,000
total	320,000	465,333	660,783	926,403
net income	160,000	254,667	419,217	693,597
proof				0

 

4th look – contribution to profit
	20x1	20x2	20x3	20x4
product a
gross profit	750,000	787,500	826,876	868,219
less selling costs	-210,000	-220,500	-231,525	-243,101
profit contribution amount	540,000	567,000	595,351	625,118
product b
gross profit	480,000	720,000	1,080,000	1,620,000
less selling costs	-210,000	-180,000	-270,000	-405,000
profit contribution amount	270,000	540,000	810,000	1,215,000
entire company
total profit contribution	810,000	1,107,000	1,405,351	1,840,118
less overhead and admin expenses	-1,200,000	-1,284,000	-1,348,200	-1,415,610
net income	-390,000	-177,000	57,151	424,508

 

 

sales
	20x1	20x2	20x3	20x4
product a	3,000,000	3,150,000	3,307,500	3,472,875
product b	600,000	900,000	1,350,000	2,025,000

profit contribution amount
	20x1	20x2	20x3	20x4
product a	540,000	567,000	595,351	625,118
product b	270,000	540,000	810,000	1,215,000

 

posted on june 12, 2023