Business and financial goal setting today isn’t like the goal setting of yesteryear.
With a year of pandemic, social upheaval and political unrest behind us, conventional goals like increasing sales and profitability are still important. But other financial objectives, including cash flow, flexibility and resiliency are coming to the fore.
In January 2020, Rob Stephens, a CPA and founder of CFO Perspective, was giving a talk to a group of business owners when one asked how large should their emergency funds be.
Naturally, Stephens' answer did not reflect the reality of what 2020 would be.
“None of us had any idea business would have to shut down,” he recalls. “We have all learned there is a huge amount of uncertainty.”
Even so, setting financial goals is still a part of basic business practice.
“Few businesses have ever achieved anything noteworthy without a goal—they tend to simply drift with the current,” says Brooke Lively, president and founder of Cathedral Capital, a Fort Worth, Texas-based outsourced CFO firm.
“Without a specific goal," Lively continues, "your business has no reference point and, therefore, no strategy will come forward.”
Financial Goal Setting Techniques
Goals help business owners decide where to focus the limited resources of time and money, Stephens notes. They can also be an invaluable shorthand for communicating the business’s vision to key stakeholders such as employees and customers.
“I can use grand visions and lofty words, but business and financial goals are the practical way to communicate in specifics what we’re going to do as a team,” Stephens says.
The process of business and financial goal setting begins with determining the long-term objective for the company.
“Where are you ultimately heading?” Stephens asks.
A family business intended to be handed down to the next generation will have different goals than one aiming at an initial public offering or being acquired by a larger company, for instance.
Personal preference also matters. Some business owners want maximum growth. Others prefer slower growth allowing for less debt and few or no outside investors. For some, limiting the amount of time and attention needed to run the company is an important goal.
Where you are now is another factor. Goals change as a company progresses through its lifecycle.
“Early on, you are just trying to gain customers,” Stephens says. “Then your top line is driving goals. Eventually, your investors are going to say the top line revenue needs to flow to the bottom line.”
Selecting Financial Goals
Goal setting often starts and sometimes ends with sales targets.
“The most typical goals we see relate to increases in top-line revenue or client numbers,” Lively confirms.
“Unfortunately, when companies take an exclusively top-line approach, they rarely end up being efficient with the additional revenue,” she adds. “Make sure you always match a top-line goal such as a 30 percent increase in revenue with a bottom-line or profit-driven goal such as a 15 percent profit margin.”
Lively’s recommended goal setting approach is to start with the previous year’s numbers for expenses and revenues. Then add expected effects of new initiatives (such as ad campaigns) on expense and revenues.
“Then start to dream—what do you really want to achieve this year?” she recommends.
In addition to shooting for a straight-forward percentage increase in sales, many companies this year are looking for new sources of sales. A late 2020 survey of 283 business people by business plan software company Palo Alto Software found that more than 33 percent "plan on adding new resources of revenue" in 2021.
Sales and profits are essential for long-term business viability in any environment. But 2020 clarified how vital cash flow goals can be, especially when sudden and unexpected setbacks occur.
“You can survive a long time without profits, but lack of cash leads to instant death,” Stephen says. “Focus on cash-flow projections. If you had a tough 2020, you may need to rebuild cash reserves for future unknowns.”
He also urges business owners to include goals for improving the metrics they use to measure the way sales are converted into cash.
“Speeding up the time between when you spend a dollar and collect a dollar really does impact your operations, your flexibility and your costs,” Stephens says.
Setting financial goals for cash flow and cash conversion—and monitoring the business’s progress in meeting those goals—guides future financial decisions.
“You have to do cash-flow projections,” Stephens says. “That’s how you find out when you’ll have to borrow.”
Setting goals for metrics that aren’t specifically financial, such as customer satisfaction can also have major financial impacts. For instance, Stephens says global supply chain disruption wrought by the pandemic has some businesses looking to source products closer to home. The goal is to boost reliability and speed of resupply, rather than seeking only the most cost-effective suppliers who may be across an ocean.
Unfortunately, when companies take an exclusively top-line approach, they rarely end up being efficient with the additional revenue. Make sure you always match a top-line goal such as a 30 percent increase in revenue with a bottom-line or profit-driven goal such as a 15 percent profit margin.
—Brooke Lively, president and founder, Cathedral Capital
Yet another non-financial goal many businesses have is, perhaps not surprisingly, getting better at planning and goal setting. Palo Alto’s survey reported business owners were hoping to get better at updating and pivoting business models, forecasting and scenario planning, marketing and research and maintaining and improving cash flow.
The Limits of Financial Goal Setting
Just as setting only sales goals isn't adequate for most businesses, setting only one financial goal for any given metric is equally unhelpful. A better way is to plan for uncertainty and have different goals for different scenarios.
Lively says her approach is to come up with Good, Better and Best goals.
“The Good should be fairly easily achievable, the Better should be a stretch and the Best should be a big stretch,” she says.
For 2021, a big factor is likely to be how open the economy is.
“For instance, the Good would be a scenario where significant restrictions remain on businesses' ability to operate,” she says. “The Better would be a partial lockdown, and Best is what would happen if all restrictions are lifted, and the economy returns to a version of itself before the pandemic.”
Mapping out three or more scenarios allows business owners to switch goals during the course of the year as events play out. Stephens emphasizes that setting goals is not something to do and set aside.
“It’s a process of taking your vision for your company and working your way down to what you do next,” Stephens says. “Along that path, you’ll constantly make adjustments until you lock in a final plan. And that plan is subject to change as the business environment changes or you get more information.”
In some ways, such as the shift to remote working, 2020 was an acceleration of existing trends rather than something completely new. Still, there’s no doubt that the year set new standards for the suddenness with which a business, an industry or an economy could go from full speed to full stop. And while the pandemic and other forces of upheaval haven’t settled down yet, that doesn’t mean we can expect a replay of last year.
Extrapolating the recent past into the future is a common thinking error, Stephens says.
"Business cycles go up and down,” he says. “2021 may be very different from 2020.”
Also, he notes, the pandemic was a boon to some industries, such as videoconferencing and delivery services, while it decimated others.
The overall theme of goal setting in 2021 is one of caution, Lively thinks.
“2020 presented problems business owners hadn’t dreamed of, much less planned to overcome,” she says. “It will take a few years for most business owners to feel comfortable in their ability to navigate and plan for the future.”
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