According to small business expert Sabrina Parsons of Palo Alto Software, annual planning is all about trends and tools.

Credibly asked Parsons to provide some tips for small and medium-sized businesses as they put together plans for the upcoming year. Here’s what she had to say.

Credibly: What sorts of things should business owners focus on when planning for 2016?

Sabrina Parsons: It’s important to understand trends in your industry with regard to the cost of goods.

If you have a lot of delivery trucks or people on the road, for example, you should know what the predictions are for the price of gas, because the price of gas can be a huge variable that can change your gross margin — both positively and negatively.

If you purchase materials, it’s important to know what’s going on with them. What’s been happening in steel? What’s going on with the price of wood? Stay on top of trends that affect your business so you know whether the cost of goods will stay constant or go up or down.

Why is this so important?

Because it leads to understanding pricing which is part of planning. Based on trends, for example, can I hire another person? Do I have to initiate a surcharge for the next four or five months because one of my cost factors is going through the roof?

Are there other trends to consider besides the cost of goods?

I think understanding workforce trends is critical. Everyone in tech, for example, has to deal with parity in salaries because more and more companies are letting people work from home. That’s why if you work for Google, even if you live in Eugene, Oregon, you are still going to get a Bay Area salary.

We (Palo Alto Software) are in Eugene, Oregon and if we want to hire software engineers, it’s starting to cost us more. We just need to understand that from our employee-cost perspective.

What’s the best way to learn about and keep up with trends?

I tell people to read. Read a lot. Keep up on your industry. This includes subscribing to trade magazines, visit blogs and read the thought-leaders in your industry. You need to know what’s going on because that will help you forecast sales and costs for your business.

Besides trends, what else is important?

You have to understand marketing benchmarks for your industry. In other words, what are companies spending and on what? What percentage of sales is getting spent on average?

This is one place where often times I see business owners totally at a loss — especially if they didn’t go to business school. Marketing can be very elusive. They want to know where do I spend my money? Why does one thing work and not another?

What’s the number one problem SMBs have regarding marketing?

Many times in business plans, I see ridiculously low numbers in marketing. I’m talking about people who say, “I’m going to grow this business to $5 million and I’m going to spend $20,000 a year in marketing.”

You’re not going to be a $5 million business spending $20,000 a year in marketing.

How do owners of SMBs determine how much to spend?

The benchmarks are easy to find. It’s as simple as an online search, in your sector, on “percent of sales spent on marketing.” This will give you a baseline from which you can build your own plan.

A rule of thumb is that you should spend between 35 and 40% of sales on marketing. That includes your staff in marketing and sales.

Anything else regarding marketing and sales?

So much of what you do is trackable. If you run a test on marketing before you spend thousands of dollars on it and determine whether it works or not, you’re going to be better off.

This can be such things as using Groupon versus putting a coupon out there through an email to all your customers.

Or, you can do pay-per-click marketing on Google. There are tons of tools to help you track all of this, track success, and actually understand whether it makes a difference.

Look, if you do a sale and give 30% off, you had better be producing at least 35% more customers or it doesn’t matter. Many times business owners don’t do the math. They’ll do 30% off, get 20% more customers and at the end of the day discover they lost money. In that case, they should have just not done a sale.

Related article: Why Your Restaurant Should Abandon Coupons and Embrace Loyalty Programs

Getting back to benchmarks, where else can SMBs find information on industry benchmarks?

If you belong to any trade association, that’s usually a benefit. You can get a lot of great information through the U.S. Census. Search on the name of your industry and the term benchmarks.

One website, called SizeUp is free and has a lot of that type of benchmark information by industry.

Our tool, LivePlan actually has all the industries by NAICS (North American Industry Classification System) code. We give you the benchmarks for eight different metrics. You can look at how that benchmark compares to your forecast value and to your actual value.

What about using past experience as part of the planning process?

What you want to make sure of is that you are not looking at anomalies when you look back. Look at trends for the last three years. Don’t just look at last year.

When you look at the past, think about it from a trend perspective. One year isn’t a trend. Two years helps, but if you can look at three years then you start to get a better sense of what you can expect.

Any final words regarding planning for 2016?

Make sure you understand, as you plan for growth, the relationship between increasing revenue and the cost involved.

Many times there are upfront costs to increasing revenue, and depending on the type of business that might mean for the upcoming year it takes six months to recoup the cost or even start seeing production from the five new sales people you added, for example.

If you’re planning this just 12 months ahead that might not be enough to understand the implication of these five new hires. On both sides of it, when you look at the past, you really need to look at trends.

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