Most business owners know that keeping their bottom line healthy is an essential task. And yet, an astounding 82% of businesses still fail because of problems with their cash flow.
That can only be happening for one of two reasons. Either business owners aren’t nearly as adept as they should be at financial management principles like overseeing cash flow, or they’re failing to devise and execute a sensible financial strategy to meet critical goals. In the case of the former, some remedial courses in business finance are in order.
But in the case of the latter — some simple changes to their planning and execution process may be just the remedy they need. With that in mind, here are five steps to achieving the financial goals you set for your business.
By following them, you should be able to secure your business’s financial future and achieve the success you’ve been working so hard for.
Let’s dive in.
Step 1: Understand Your Business’s Current Financial Condition
Before your business can get where you want it to go, you must first understand exactly where it presently is. And that means understanding your business’s financial condition inside and out.
That way, you’ll know how much financial ground your business will need to cover to achieve the financial goals you’re setting for it.
The first step in the process is to examine the business’s most current financial statements, income statements, and cash flow statements. From there, you can calculate some crucial baseline numbers that reflect where your business stands. These figures include:
- Gross and net profit margins – the percentage of profits both before and after relevant expenses are applied.
- Current ratio – a figure that reflects the difference between the business’s current assets and liabilities.
- Quick ratio — a figure that describes the business’s ability to cover short-term debts using only highly liquid asset types.
The idea is to figure out if your business is starting from a position of financial stability, or if you’ll have to make changes to achieve it. In either case, what you find will inform what kind of goals you’ll need to set.
Step 2: Create a Financial Forecast Using Current Data
Once you’ve got some baseline financial figures to work with, the next step is to create a financial forecast. If you handle your financial forecast wisely, this step should give you a reasonable idea of how the business will perform into the near future — even if you make no changes to your operations.
Many experts believe financial forecasting is one of the most important techniques business leaders have to judge how well (or how poorly) their business is likely to do, strictly from the perspective of financial data projections.
And be aware — there’s more than one kind of financial forecast you can prepare for your business. In this case, what you want is a forecast that will cover the appropriate period during which you plan to work towards the financial goals you’re going to set.
And, for simplicity’s sake, you should be creating a straight-line financial forecast, because it requires nothing but the data you already have in hand.
Step 3: Set Reasonable Goals
One of the most common reasons that businesses don’t meet their financial goals is that the goals they set aren’t reasonable in the first place.
Indeed, there’s arguably no better way to set yourself up for failure than by aiming for a result that’s not possible to achieve. But now, with your financial forecast in hand, you should be more than capable of setting some reasonable financial goals.
An excellent way to make sure your goals stay reasonable is to set them using the S.M.A.R.T. formula. It’s an acronym that helps you to set goals that are:
In short, it will help you to set financial goals that consist of things you’re capable of achieving and that have clear metrics and timeframes you can use to gauge your success. To help you along, here’s a handy template you can use to create your first S.M.A.R.T. financial goal. There are also some great templates available that are specific to financial planning needs.
Step 4: Develop an Action Plan
Now that you know where your business stands and have some clear financial goals set, the next step is to define an action plan to achieve them. At this point, you’re going to need to draw on your whole team to find the right path forward.
For example, if one of your financial goals is to achieve a 10% improvement in sales within a six-month time frame, you’ll want to huddle with your sales team to figure out how best to achieve it.
The idea isn’t just to solicit ideas, however. It’s also to achieve a consensus with the people who will be doing the heavy lifting to execute the plan. This is something that many business leaders neglect at their peril.
After all, success requires buy-in from relevant stakeholders. And there’s no better way to get buy-in than by giving those stakeholders a seat at the decision-making table.
Step 5: Execute, Measure, Iterate
At this point, all that’s left to do is to execute your plan. And as it happens, you’ll want to measure your progress using the success metrics you so clearly defined in the goal-setting phase.
But for best results, you’ll want to keep track of those metrics as close to real-time as possible. That will give you valuable insight into how well your plan is working.
But charting your success metrics in real-time should also alert you to any problems that might be hindering your progress toward the stated goal. That will offer you an opportunity to make changes when necessary or to reallocate resources if it appears that the initiative needs a bit more help along the way.
And, if it turns out that your plan won’t get you all the way to the goal you’ve set, it should at least help you to identify weaknesses in the plan so you can correct them and try again.
That kind of iteration is the key to perfecting processes — and is one of the best ways that you can ensure that your business meets its financial goals over the long term.
At the end of the day, a business can only achieve its financial goals if a few conditions are met. The first is that those goals are rooted in a thorough understanding of the business’s finances and represent attainable outcomes.
And the second is that those tasked with executing and overseeing the plans to get there all do their part.
By using the steps above as a template, however, business owners and managers can improve their odds of achieving critical financial goals and securing their business’s future.