When it comes to goal setting, we frequently hear about setting SMART goals.
And I’m all in favor of goals being SMART; it is a simple framework to use when implementing goals, but I’d like to talk about goals from a different perspective.
If you are running a business, I think it’s important to set the company goals from a 10,000-foot perspective. What I mean by this is, step back and look at what you are trying to achieve overall and then determine how the various pieces that make up the whole fit together.
For a lot of small business owners, the number one goal is to support themselves. If this is true of you, then you need to look at your personal needs first. How much do you need to support yourself and/or your family? If the company is owned and run by a husband and wife team, then is it going to be the sole support for both of you? If so, how much do you need to live on?
The next highest priority may be to have enough money to pay your quarterly taxes on time. As a small business owner, you are responsible for pre-paying estimated taxes each quarter. It is a lot more feasible to pay these as you go along instead of waiting until the end of the year and having to come up with a large amount all at once.
Other possible goals could be to pay off debt, to purchase a new piece of equipment, add additional staff, or start investing in a retirement plan. It’s an individual choice but I would say it’s best to set your top three to five financial goals for the year.
Once you have decided what your top monetary goals are then you need to fit them all together to create your annual budget. Assuming your number one priority is to net enough profit to support your personal needs, you must work in reverse. The net profit is the money left after all your expenses have been paid and shows at the bottom of your Profit and Loss. To get to this number you start with your income goals and subtract all your COGS (Cost of Goods Sold) and expenses, leaving your net.
When setting your annual budget, a good place to start is by looking at the Profit and Loss for the previous year, then adjusting the numbers based on anticipated changes.
But before you jump up and down at how terrific the estimated profit looks you need to take into account the money that goes out of the company that does not show on the P&L. To find this you need to look at the Balance Sheet. This is where loan payments and owner’s draws show. These payments reduce the amount of cash in the company but do not affect the P&L. I know, that’s more than a little confusing. To keep this as simple as possible, remember what you are trying to figure out is your income goals.
Or put another way, you need to make enough money to pay for the cost of running the business and still have money left to pay off debt and withdraw funds from the business for your personal expenses.
Once you have the estimated net profit calculated, then take that number and slice off what you need to meet the payments that don’t affect the P& L. This will be your draws/distributions, which will include your quarterly tax payments and your investment payments, and any debt payment.
If you find that you fall short, then it’s time to recalibrate. You either need to increase your income or reduce your expenses so that your net profit is high enough to cover the amount needed to reach your goals, or you need to adjust your goals.
It may take a little tweaking to get the numbers to line up, and you may not be able to reach all of your goals at once, but keep massaging the numbers until you come up with a realistic plan that can be written out as SMART goals.
Starting your year with a well thought out plan in place will help you focus your efforts in a strategic manner and will result in a better outcome than if you just dive in with no idea of what you are trying to achieve or how to get there.
This can be a daunting task and I don’t recommend you tackle it alone. Finding qualified help to work with you is advised. Not only will the expertise be critical to making your plan as accurate and realistic as possible, having someone to help you navigate your way through the process will reduce the stress and encourage you to complete it.