Spacely’s Space Sprockets Software company was the next up and coming startup in the business world. The owner had big financial goals and was putting all the company’s time, energy, and resources into hitting their sales goals by the end of the year. And it was working! Business was pouring in… that is, until a few months after the initial release when customers uncovered a huge vulnerability in the privacy of its users.
Spacely’s Space Sprockets Software responded immediately to the issue with all-hands on deck. The urgency of the moment was driving everything from decision making to daily tasks and the workload of employees. Unfortunately, once employees started working on a fix, new customer complaints were coming in as they uncovered bug after bug. The company was consistently fighting fires and all progress towards big picture financial goals and growing the business stopped. They spread themselves too thin, too fast, and didn’t have the proper structure in place to fight one fire properly, let alone dozens. All of these little fires (plus the one big one) culminated into one raging inferno that eventually left the company in ashes. In a little over one year, they went from the top of the startup industry to out of business.
This story is a bit extreme, but it has happened. I see companies set financial goals that are unrealistic, and then they throw all of their resources at those goals in order to meet them. But I can attest that reaching your goals doesn’t count as success if it ends up turning your business into a reactive one, instead of a proactive one.
If you are feeling like your business is operating in reactive mode instead of proactive mode, the smoke detector is going off at your business, warning you that small fires are about to billow into something bigger.
If you’re reading this, you are likely an entrepreneur that is trying to set your business up for success by being proactive, and are already thinking about your goals and priorities for next year. That’s great – but how do you know if your goal is the right one? After all, Spacely’s Space Sprockets Software thought everything was going perfectly… until it wasn’t.
If you have a big goal in mind and aren’t sure how to proactively get there, let me be your Financial Fire Marshall. I’ll take a look at what your smoke detector is telling you, and help you move from fire drill mode to fire prevention mode. I’ll take a look at your financial processes and goals, keeping a trained eye on areas where potential fires frequently start, helping you take the best next steps towards preventing them.
Preventing fires is the best way to ensure you don’t have a raging inferno on your hands weeks, months, or even years from now.
Are You Setting The Right Financial Goals & Priorities For Next Year?
In order to pivot from being in fire drill mode to fire prevention mode, you have to determine where you want to go. What are your big goals for next year? Is it to hit a total profit number? Total sales goal? What about pricing goals?
The bottom line: your goals need to be appropriate for the size and structure of your business.
Revenue Goals vs Sales Goals
Some businesses set revenue goals, while others set sales goals. How are the two different and which is right for you?
Sales goals aim to secure a certain amount of money for the business. For example, a sales goal might be to bring in $36,000 in sales. If you secure a signed contract of $36,000, you have brought in $36,000 in sales for the current year, even if the revenue is spread over a period of 3 years (which would happen if you are providing those services over 3 years).
Fire Marshall Warning: don’t lose sight of profitability when setting sales goals! If you have a poor pricing strategy, you can still lose money even when selling is going well! If this is the case for your business, I’ll be able to hear your smoke detector beeping loudly…
It’s good practice to revisit your pricing strategy often, to ensure that you are appropriately pricing your goods or services according to the cost to your company, the competition, and the market. If it’s more expensive to produce your offering than it used to be, you’ll need to increase your prices. Proactively determining how to do that with the least amount of complications is a great fire prevention method. For example: will your customers handle a price increase well? If not, consider raising prices for new customers first, and delay the price increase for current customers for a period of 6-12 months to help with your retention.
You can read more about raising prices while keeping happy customers here.
A revenue goal on the other hand, is measured on an accrual basis and has to be recognized/spread over the period services are rendered. So that $36,000 contract, spread over 36 months is $1,000 per month in revenue. This $36,000 contract will only recognize $12,000 towards the revenue goal for the first year.
Other Smart Considerations When Setting Financial Goals
There are a lot of details and small decisions that go into determining which goal is right for you and your business. Once you have determined the best big goal, there is still more to consider:
Do you need to hire more employees to meet your goals? It’s possible that you need more people to help you reach your goals, delivering on the goods and services that you provide. How many? And in which positions?
What LEADING indicators are you going to measure to know if you are on track towards meeting your goals? The key here is LEADING, since that’s what you have the largest ability to affect. For example, determining the steps that you need to take before securing a sale might be:
- For every 500 phone calls made, your average acceptance for a client meeting is 10.
- For every 10 client meetings held, your average is for 2 of those to turn into sales.
- Therefore, your sales people have a goal of making 500 phone calls a day to meet a goal of two sales per day. Then extrapolate that into weekly, monthly, and eventually an annual sales goal.
- Talk to your sales people about the number of phone calls needed rather than the number of sales.
Other examples of leading indicators can be the number of marketing materials sent, the number of email addresses obtained, or number of conferences you sponsor, etc.
Does your budget reflect your financial goals? After you know what your goals are, you can set a budget that appropriately supports them. Check out Budgeting Basics: Steps to Follow and Pitfalls to Avoid for expert tips on setting up a budget.
Partner With Huxley CPA
An ounce of prevention is worth a pound of cure. – Benjamin Franklin
Preventing fires in your business through establishing healthy financial goals is the best way to ensure your business grows next year. Contact Huxley CPA today for a Financial Fire Marshall inspection of your big goals along with the smaller goals supporting them. Together, we can prevent financial fires!