Small Business Advice: How to Set Financial Targets
Author: Russell SmithMay 29, 2012
Are you running a small business and wondering what type of financial targets you should be setting? We have the answers right here.
Here’s a small business tip: Setting financial targets is a basic, but absolutely vital task.
The term financial targets encompasses a huge range of variables, from the amount of business income and outgoings to debt and tax minimisation.
For business owners to operate successfully, having targets to aim for it’s incredibly important. It allows you to make decisions based on your performance and can indicate whether your business is meeting (or missing) your expectations.
Setting an annual profit target, for example, allows you to monitor your income and make adjustments based on target performance. Perhaps you aren’t meeting your targets and require increased advertising investment. Or, maybe you are meeting your targets quicker than previously expected and need to adjust your long-term plans based on your success.
But, how do we set financial targets?
Our specialist accountants for small businesses have identified four unique, yet valuable methods for setting financial targets. In this blog, we’ll offer up some small business advice to help you set your financial targets.
Aim High With Blue Sky Financial Targets
Go big or go home.
Blue sky financial targets are the perfect option for budding entrepreneurs, why? Because they offer limitless opportunities for growth and creativity.
Setting a blue sky financial target means setting your sights on an almost unachievable goal. The likelihood of you ever hitting that financial target is pretty slim, but it does mean you keep pressing for more development, pushing your business to grow and expand as fast as possible.
Blue sky financial targets are exciting, brilliant and entirely unstable. Pushing your business hard to meet such demands, say turn a million pound profit, allows for so many opportunities, but it also presents a number of problems.
Pushing the envelope is great for people with time, energy and endless resources, however, for those in small businesses operating on a small scale it simply isn’t feasible. Thus, it is great for entrepreneurs. When you are just starting out on a big project, you’ve got investment behind you and aren’t being held accountable for obligations to clients and staff, blue sky targets are the perfect way of getting off to a flying start.
For most businesses though, who need stable targets and achievable goals, blue sky financial targets simply don’t work.
Play it Safe With Low Financial Targets
We live in uncertain times.
For some small business owners, what you need is total and complete control and stability. You need to know you’re going to hit your targets. Maybe you need to satisfy shareholders, investors or lenders, or perhaps it’s simply a way of keeping finances in line with budget constraints.
Whatever your reasons for choosing low financial targets, the benefits and disadvantages are clear. Having low targets means they are easy to hit, you don’t have to push your business to meet them. It’s a very controlled method, there is little to no uncertainty.
However, low targets don’t exactly inspire people. Why bother putting in any extra effort if you can scrape by doing the absolute bare minimum and still classify your work as a success? If you need to set low targets then set low targets, just don’t let it result in a drop in work performance too.
Stay Level-Headed With Realistic Financial Targets
Setting realistic targets isn’t as easy as you might think. It’s not like aiming low, which all but guarantees you success. Instead, being able to set realistic financial targets relies on one thing: historic data.
The idea of a realistic financial target is that it’s tailored to your business’s past success. If you’ve brought in £100k last year, it’s reasonable to assume that’ll you’ll be able to bring in £105k this year.
To create realistic financial targets, you need to have been doing business for at least a few years. By this point, you’ll have a dataset of historical numbers that you can analyse to work out what sort of targets are realistic. Our specialist accountants for small businesses love this method, as it offers real and convincingly achievable goals based on past performance.
The problem with realistic financial targets is that they encourage the status quo to be maintained. By setting your sights on maintenance, rather than expansion, you’re unlikely to find that inspiration or push you need to step things up a notch.
In a scenario where your business is achieving all the success you want for it, maintaining the norm through realistic financial targets is perfect. It helps ensure stability while not going backwards. However, if you are looking to grow your business, you need another strategy.
Set Reachable Goals with Stretched Financial Targets
A stretched target sits beautifully in between realistic and blue sky.
Like realistic, it is based on historical data yet, like blue sky, it also encourages you to push for more impressive targets.
The idea is simple.
Let’s go back to that £100k figure. You’ve earned that in the last financial year, but your business has improved on how it operates since then and also increased profits from £75k the previous year. So, this year, you target £125k.
It’s based on realistic figures, as it takes into account how you’ve performed in the past. It allows you to aim bigger, expand and evolve without pushing your business to its breaking point. There is only one downside.
If you fail to reach your target for the first quarter, it is unlikely you’ll hit the overall target for the year. This can be incredibly demoralising, resulting in a drop in enthusiasm and a lull in work attitude.