How to Set Specific Financial Targets
Together with clear mission and objectives, the financial targets are the foundation of any successful business. So I just wanted to share a few thoughts around initial steps to start the process of setting targets
If you don’t know where you’re going…
Every business needs goals. And while many business owners are quick to develop a plan of what to do and how to do it, many forget to build the foundation – specific financial goals along the lines of numbers of sales, total customers, market share achieved, etc. These are important because they underlie and inform every business plan and decision. For example, think about a company that plans to release five new products each month and has a marketing plan that will reach thousands of potential new customers every week – a substantial increase in previous marketing attempts. If their plans are successful and they achieve a new level of sales… well, it sounds great, right? But what if they didn’t think far enough ahead to foresee the extra customer services and distribution demands that this would place on their business model and end up with hundreds of disappointed, angry ex-customers? This is a common scenario in the business world. Success can be a danger all on its own – unless you plan for it.
Build your foundations first
When you have concrete financial goals, you can build solid business plans on top of them. For example, if you know that your first business goal is to achieve a hundred sales a week within three months, you know that you not only need to work out a plan for how to achieve those hundred sales, but also ensure that within three months, you’ve put together the infrastructure – customer service, accounts, shipping – to handle the volume of sales. And then, when you achieve that goal and set your sights on one thousand sales a week, you can plan for the expanded infrastructure you’ll need to support that goal, as well as the map for how to get there.
Building a business plan on your goals
Once you have your financial goals, you can develop business plans on top of them.
Identify key drivers to achieve your goals. Common key drivers are:
- Units sold
- Number of prospects
- Key staff
- Product quality and uniqueness
- Building relationships
For example, if your goal is 20% market share, then you’ll need to work out how to affect your market share (e.g. successful marketing strategy or a product that meets market requirements and has unique features and applications). You’ll also need to figure out what to do as your market share increases and affects your sales and operations.
Goal setting steps
Most small businesses will focus their target on turnover and more importantly profitability, because they don’t usually have the luxury of accessing extra funding and hence have to very quickly produce services at a profitable level. For this type of business, the following goal setting steps can be followed:
- Calculate the market acceptable price for your product or service.
- Identify the direct costs involved in bringing that product to the market.
- Measure the overhead costs needed to support the business.
- Calculate the net resulting profit that can be made from each product sold (price-direct costs-overhead costs= net profit per product).
- Calculate the number of units that need to be sold to arrive at the overall profit level desired per month.
By doing this exercise you can now focus on the number of units you need to sell on a monthly basis. You can communicate this number to the rest of your team and set any applicable KPIs and bonuses to ensure that you arrive at your target. For example: the sales managers’ KPI will be on units of sales, whereas the office managers’ KPI will be based on controlling overhead costs to ensure profitability is achieved and ensuring the correct level of resources available to achieve the goal.
We’ll talk more about KPIs in our next Blog.