How to set great financial goals for your business – four key steps
Nearly every business would like to do better, but not every business owner is sure how to achieve this.
One common way we are told we can improve is to set goals so that we have something to aim for. This makes sense, but how best to do it? I’ve seen many businesses do this in various ways and the best businesses which consistently make large profits have four key things in common. These four things are discussed below. I hope they help your business.
- Know exactly what you are going to do with your profit
The typical goal is to make a profit of a certain amount. That’s fine but it’s only half the picture. What are you going to do with this profit? For starters, there’ll be tax to pay on it. How much will this be and what exactly will you do with the remainder? Pay off debt? Pay yourself dividends? Reinvest in capital equipment? Or a combination of these.
If you don’t know exactly what you want to do with your profit, your goal is too vague to promote the best possible actions and direction for your business.
Contrast the position of someone who says, I want to make $70k this year with someone who says, I want to build up my cash reserves to the equivalent of 3 months of operating costs which is $50k. The latter is far more likely to succeed because the outcome is so much better defined.
When you know exactly what you will do with your profit, you have far more clearly defined the purpose for your goal and it is this purpose that will help drive you to success.
- Know what will drive the profit of your business, so you can focus on these drivers
Many business owners have a goal to reach a certain profit and hopefully now have plans for something very specific with this profit.
The problem with this is that there can be a lack of clarity as what exactly you need to do to reach these goals. It’s not enough to say ‘I have to increase sales by $100k’ or ‘I have to work a bit harder’. You have to know in precise detail what things will create the profit you need.
Profit is the result of the following equations, as we can consider our business a few different ways.
If you run a retail business, we think about profit being derived from customer numbers x average sales per customer x average margin per sale less operating costs.
If you are selling yours and others time, such as professional services, it might be considered to be employee numbers x billable hours per employee x hourly rate less wages and other operating costs.
If you have staff selling products (eg. you run a real estate business with several sales people), it might be considered something like number of staff x number of sales per employee x average sale value per employee, less the cost of the product, wages and other operating costs.
In all these examples, there are several variables making up profit. The question is, which variables need to change and by how much in order to obtain your goals.
- Set up the Financial Model
So now we have considered what you will do with your profit and the variables that drive your profit. The next problem to solve is understanding how changing these variables impacts on your profit.
If you don’t do this, you risk ‘pulling the wrong levers’ or focussing on the wrong things.
For example, you may run a retail business and want to get more customer numbers, but if your average margins are really low, getting more customers may not make the difference needed to reach your desired profit.
To overcome this problem, you need to understand your ‘financial model’. This is a picture of your business that shows the key profit variables, what they currently are and what they need to look like.
Your financial model will reflect the nature of your business. For this example, we’ll use the real estate business. Currently you have 3 sales staff who each sell an average of 23 homes each year with an average sales commission amount of $8,000. This results in revenue of $552,000 pa.
You now have your key variables defined and measured, being number of sales staff, number of homes each staff sell per year and average sales commission amount.
These variables need to be laid out in a clear spreadsheet that allows you to easily see the current situation and how changing each of these variables impacts on profit. Once you have done this, you will know which of the variables is the most important to focus on and how much you have to change the numbers to get the desired profit. This will then form the basis for your growth strategy. Financial model templates for various businesses will soon be at https://www.morrisonabs.com.au/financial-modelling/
- Measure the Key Drivers of Your Business’s Profit
So now you know exactly what you will do with your profit, the variables that drive your profit and which variables you want to target.
The next steps are to;
- Set specific goals for these variables, which you may label as ‘Key Performance Indicators’.
Your financial model will help you set these goals. Obviously these goals should be achievable but high enough to be something to strive for.
- Communicate the goals and KPI’s to your team
It’s no good keeping them to yourself, you need to share them with the people who are going to help you achieve them.
If your business hasn’t set specific goals before, your staff may be wary of what the goals and implications for not reaching them are. Ensure these are clear before you start communicating.
- Measure the KPI’s obsessively.
This step is super-important. You need to measure the KPI’s obsessively. Every day you need to know exactly what’s going on in relation to them. Doing this allows you to take action straight away if the goals aren’t being met. It allows you to direct the business and staff and focus on what’s important.
- Set up a regular review process
The last step is to set up a regular review process in which you consider the goals and KPI’s over a reasonable period of time, for example monthly or quarterly and consider what has worked and what hasn’t.
This will give you a chance to obtain staff feedback, reflect on what has worked and what hasn’t over a period of time and reset your goals if need be.
Summary
Setting great financial goals can make a significant difference to your business. It will orient your business properly so your actions will bring you the success you want. It’s not hard to do but to be successful, it’s not as simple as just saying ‘I want to make X profit’. You need to be really clear on what you will do the profit, what drives your profit and what you need to focus on, as well as measure your progress obsessively.
Good luck with your goal setting and if you want to have a chat about how to best set goals for your business, get in contact.