In my experience as a Business & Leadership Coach, I have noticed that many have not set financial goals personally as well as for the business. Even if they have, sometimes they lack clarity and are unsure how to go about fixing the financial goals.
Without setting financial goals, the business is like a headless chicken and is all over. It lacks direction and clarity in action. Hence it is important to have well defined, holistic financial goals. The culmination of all the business goals would translate into financial terms. Here is a step by step guided approach in defining the goals for your business pivoting on the financial aspect.
- The first step you can take towards your business’ financial progress is to set the right financial goals. Your investors and the Board could demand growth & pressurize you despite the market situation. So understand from your stakeholders what their expectations are in terms of growth, what you and your team can deliver. Thereafter arrive at a realistic consensus with your stakeholders on what you have crafted for the growth of the business. An important point while doing this, is not to get carried away by your “wish list” and keeping the financial goals real and practical.
Remember that while you may have your own challenges to achieve the goals, the stakeholders would want their share of return on investment because they have invested in the business. There are times when conflicts arise due to this mismatch of expectations & failed or delayed deliveries, which are covered up with reasons / excuses on why the goals were not achieved. Hence it is advisable to start with clear understanding from both the sides.
If your business does not have stakeholders or investors, and you are the sole owner, then you are answerable to yourself. Just because there is no external person to question the performance of your business, does not mean that you are not accountable to yourself. If you want an accountability partner, get yourself to work with a Business Coach who can also act like your sounding board too. The coach can also work with you on maximising your business potential.
- Whilst you may not be able to control the external market conditions, what is under your control is steering the profits of your business, within the means that are possible for you. Therefore, plan your goals based on what you can control. It is essential for you to have specific financial goals rather than ambiguous financial growth desires.
- Financial goals can mean increase in turnover, being debt free, better cash flow, higher profits, increase in market share, higher earnings per share, better returns on investment, higher levels of productivity etc. It could mean any one of these or a mix of them. It depends on what you want to set yourself as a target for your business and achieve it. It is also essential to understand the impact that each of these will have on the overall wellness of the business. Whatever be your financial goals, it should be realistic with a strong intention for you to achieve it. Also know your purpose of setting the particular goal, as it makes it easier to work towards achieving the financial goal.
- So, what is it that you want your business to achieve in financial terms? How would you quantify the growth that you seek? Does an increase in the top line also mean that your business profits are growing? If yes, is the growth rate the same, better or worse? Think on these lines and add on any other specific parameters that are crucial and relevant to your business like for instance the percentage of the market share you may seek or if the stock price should reach a particular level etc.
Therefore, what can be the basis of arriving at the financial goals? You can use this as a thumb rule to set the financial goals of your business. To state it in simple terms, remember the name TOM as an acronym. It stands for:
|T – Time frame
O – Objectives
M – Measurement
Time frame – What is the time frame you are looking at? Split it into short term, medium term and long term periods of time. Also be clear in your intent with regard to the duration of each of these terms. Usually it could be that short term is for about twelve months, medium term is from a year to 3 years and long term could mean over 3 years. It could also be a good idea to state the goals to all the concerned stakeholders and get their buy in. Review the goals periodically and make necessary changes as the situation warrants.
Objectives – What are the financial objectives you want to achieve? Define it clearly. Top line growth, increase in margins, free cash flow, better dividends, capex purchase etc. should be spelt out without ambiguity. While most of these are interlinked, it is better to state them explicitly. Instead of focusing on many, it may be better to start with few focused areas as the business demands. There needs to be transparency and better understanding for working effectively as a team, with the larger purpose of the organisation given the top priority.
Measurement – What are the important metrics to measure? Define them. What is the variance with the set budgets? Analyse it. What are the reasons for the same? Scrutinise them. All financial goals need to be measured and quantified. Whatever are the areas of focus for increase or decrease, it would be good to state them as absolute numbers or as specific percentages, for better clarity and create the path ahead. Once finalised, communicate and share with the teams, so that everyone can work towards the same goals.
By having well stated goals, it helps you in working towards accomplishing a particular task. And needless to say, upon achieving your goals, you feel good about yourself and have a sense of satisfaction.