Too few choose to ignore it, or simply don’t do properly, yet setting small business financial goals is a practice that can change the way you look at your business. Paying attention and getting it right, then, is absolutely vital.
A financial goal is a target; something you put in place with hopes of achieving at the end of a set period of time. This can be done monthly or quarterly, but more commonly is practised annually. This idea is simple: you set yourself a financial goal at the start of the year, allowing you to compare your progress to what you wanted to achieve by the time the year is out.
Benefits of small business financial goals
Financial goals are a powerful tool when it comes to maintaining the health of a business. They allow you to monitor and adjust your trajectory based on performance which, in turn, means you are more likely to achieve your business aspirations.
Without financial goals, you don’t have a bar to compare your success against. Without that bar, it is much harder to know when your business is underperforming.
Small business financial goals are also key in attracting investors, shareholders and lenders. Being able to provide a financial outlook for your business not only demonstrates control and strong business acumen — something investors in particular are on the hunt for — but also makes your business more attractive. You can then provide a representation of potential profitability; this must be backed up by evidence, though.
Types of financial goals
Financial goals are usually broken down into four sub-categories, each with their own specific benefits and drawbacks:
- Blue Sky: The sky’s the limit with this type of target. You set this small business financial goal if you want your profit boundaries to soar. This is the target of the brand new startup with lots of investment, or the crazy entrepreneur who wants the world. With this kind of vision, always pushing for even more, you have no limitations on creativity, possibility and growth. All sounds great, right? Well, it’s not for everyone. Blue sky targets have zero stability, meaning you play a very dangerous game. If things don’t go well, you can crash and burn.
Example: A brand new business seeking £1 million turnover in year one.
- Lowball: There is nothing more demoralising for you — and nothing more discouraging for your shareholders, investors and lenders — than missing your financial target. A business that falls short of expectations is a business that isn’t going to last very long. But what do you do if you think you are about to have a bad year? Setting low financial targets is the best way to avoid problems and hit your targets. It offers complete control over your situation, as you set yourself a target you know you can easily hit. Lowball targets are a great way to ensure stability in uncertain times. However, they don’t exactly inspire growth or development. Be careful when setting low small business financial goals, as you might find performance can also dip without that drive to learn and evolve.
Example: You need £80,000 to survive the year. Although you’ve made more before, you still target that survival benchmark.
- Realistic: A realistic target is perhaps the most common small business financial goal. The idea is simple and relies on historic data from previous years in operation, promoting stability while also moving forward. By using your past experience, you can make realistic assumptions about where your business is going.
Example: In 2015, your business made a £130,000 profit. In 2016, it made £140,000. Growth is continuing at a similar rate, so 2017’s realistic target would be £150,000.
- Stretched: A stretched target is very similar to a realistic target, although it just pushes your business that little bit further. Take the data you would use to make realistic targets, then consider your business aspirations and if you’d like to focus on a greater level of growth. It isn’t the rash move that blue sky targets are, but it gives you a bit more drive than realistic goals. The only issue with stretched targets is that if you fail to hit your first quarter income projections, you’ll almost certainly be trailing the entire year. This is bad for morale and bad for investor confidence.
Example: Our realistic target is 150,000, but we are interested in more growth, setting our sights on £165,000.
How to set your goals
Setting your business goals is all about what you want to achieve and what your business can actually achieve. Setting goals that do not reflect your aspirations or the capabilities of your business is not conducive to success. Targeting blue sky goals when your business is a local farm shop isn’t going to mean you suddenly turn into a corporate giant. Likewise, setting yourself up with low expectations when you’ve just launched a hot new mobile app is begging for failure.
Setting your goals requires you to:
- Understand your industry
- Understand your personal aspirations
- Understand your business potential
You can set your goals yourself, or with the help of an accountancy firm. Either way, it is important to remember that a farm shop doesn’t have to avoid trying to make more profit, and a mobile app developer doesn’t have to aim to top Snapchat, but they shouldn’t go far too in the opposite way, either. Think about your business, think about what you as a business owner want, and pick a target that reflects both of those factors. Once you have a target, you can move forward with a greater level of control and understanding of your financial situation.