July is here and it’s time to get the tax done.
That’s certainly true but it’s NOT the most pressing task for your business. That should be documenting your financial goals for the year.
In my experience, business owners who engage in annual financial goal setting and regularly track and compare what they are achieving to what was planned, achieve more: that’s more profit, more time, more cash - or the trifecta of all three!
If that isn’t compelling enough, every SME owner should be setting financial goals and budgeting because it will help to transform five key aspects of the business…
1. Financial goal setting helps you make more profit
Research has shown that people who set, record and share their goals are more successful than those who don’t.
The same applies in businesses.
By thinking through, documenting and sharing your goals for the year ahead, everyone within your business and advisory network knows what you want to achieve and will therefore be in a position to support you in your goals.
2. It holds you and your business accountable
Sharing your financial goals is arguably the most important part of the goal setting process.
By communicating your goals with your accountant, advisers and team members, you are essentially forced into reviewing your progress on a regular basis.
This review should include three questions in particular, relating to why the business is above or below its budgeted goal:
- What caused us to be above or below our budgeted goal?
- What lessons can be learned from this result?
- What actions can we take to continue to be above budget/help us meet our budgeted goal?
3. It helps you manage your growth plans and cash requirements
Most owners plan to grow their business year on year. But growth, if unplanned, can have significant cash flow implications.
By financial goal setting and introducing a budget, you start to model your growth plan for the future and highlight any areas for potential cash flow stress.
The three main areas of cash flow stress to watch out for are:
- Debtors or accounts receivable. Unless your business is a cash on delivery of product or service, an increase in income will lead to an increase in debtors. This will tie up cash flow for 7-60 days, depending on your customers and payment terms.
- Inventory or Work In Progress. An increase in income is likely to require increased stock or work in progress levels to meet the higher demand for your product or service. Failure to manage this could result in lost sales opportunities. Does your business have the cash reserves to invest in increased inventory?
- Increased expenses. When sales increase, so do your expenses. They shouldn’t increase to the same degree but they’re still likely to rise. When combined with the other two cash flow absorbers, it’s easy to see how cash can dry up, despite sales and profitability increasing.
4. Financial goal setting helps you plan capital investments
Large capital expenditure for equipment and the like should be planned out in advance.
Including expected outlays in your financial goal setting allows you to model how the new equipment will affect the overall financial position in your business.
New equipment can bring benefits such as greater capacity, new services/products or reduced repairs and maintenance costs. The risks involve funding it and being able to afford the repayment terms .
5. You can pay yourself regularly and on time!
This is arguably the most important reason for you and your family.
The business owner is always the last to be paid. Therefore, it’s important to plan and include your own financial needs in your budget and cash flow forecast.
Remember - financial goal setting with a budget and cash flow projection is as necessary for a business as filing a tax return.
So this July, have a good think about the coming year. And look ahead to growing and developing a better business by setting your financial goals!
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