Oh boy, another post about setting goals—blah, blah, blah. I hear you, and I promise to be different!
(We even created an eBook based on this article, but don't skip reading this before downloading the workbook.)
This article is going to show you exactly what you need to do to accomplish your business financial goals—every time. But you must start with a goal. I know that sounds silly, but a lot of business owners have just stopped making them.
One of my favorite conversations with a business owner about financial goal setting went as follows (I promise I’m not making this up):
Adam: “What are your goals for this year?”
Business Owner (Stacy—to remain anonymous!): “I don’t have any.”
Adam: “Why is that?”
Stacy: “Because they don’t work.”
Adam: “What do you mean setting goals doesn’t work?”
Stacy: “I never accomplish the goal, so it doesn’t work, right? So, I’m just not going to do it.”
If this pattern of thinking in Stacy sounds like yours (or at least some version of this), you are in the right place. If you thumped yourself on the chest as you proudly exclaimed, “I don’t make New Year’s resolutions,” while inwardly saying, “Because I know I’ll never keep them,” rejoice! You are in good company and in the right place! We are going to fix all that—at least when it comes to setting financial goals as a business owner.
Meeting financial goals is a lot like getting in physical shape, trying to be more spiritual, and all that other stuff we should be trying to improve in our lives. But hey, I’m a CPA who advises business owners, not a life coach, so I’m going to stay in my lane on this one and focus on your financial goals. So here goes!
This how-to guide is going to give you an extremely specific set of steps that, if you follow them, I promise you will either meet, exceed, or just about meet (but be way better off than you were) what you set out to accomplish financially as a business owner.
The steps are simple:
- Set a realistic goal.
- Set out a plan of action for accomplishing the goal.
The problem that most business owners face is the execution of these two simple steps. So, let’s break each down:
Step One: Set a Realistic Goal
Most people have heard the acronym SMART in goal setting (Specific, Measurable, Achievable, Relevant, Time-Bound). They get super excited about the first two letters and bookend it by setting a date. So really, at this point, they’ve set an SMT goal—which is not a SMART goal—because they completely ignored the A and the R!
This is especially true when it comes to setting financial goals. My theory is that people fail at financial goals because they aren’t realistic, and they aren’t actionable—truly—when evaluated honestly. So, let’s start by setting a realistic goal.
Most business owners’ primary source of income is the business, so the first realistic financial goal is going to be a personal income goal, as nothing else really matters too much. You are the best judge of whether you are content with what you make. If you are not content, you likely want to focus on making more. However, here’s the first step in determining whether your discontent is realistic.
Use a simple ratio—the debt-to-income ratio—to determine if you are even making enough to be comfortable. This ratio is:
Monthly mortgage payment ÷ 0.25 = Take-Home Pay
Take-Home Pay × 12 = Annual Income Needed
Where Take-Home Pay is your net income deposited in your bank account that is yours to use (e.g., not tax distributions or expense reimbursements). This should be from all sources—W-2 or distributions/dividends. If you have a second home that is a vacation home, include its mortgage in this as well. If that second home is also a rental, just include the amount not covered by rent.
As a simple example, if your mortgage payment is $4,000/month, then your net take-home pay needs to be $192,000 to be comfortable—e.g., not sweating money all the time.
Once you run this scenario, you are either making enough or not.
If you are making enough, and you are still able to set aside 30% of this for retirement and savings—$57,600—congratulations! You are doing really well, and while you should still set goals (and the rest of this post is relevant), stop worrying so much and have some fun!
If, on the other hand, you aren’t saving this amount, calculate the gap in your savings. For example:
- Target savings: $57,600
- Actual savings: $25,000
- Gap: $57,600 - $25,000 = $32,600
Therefore, your new goal would be $192,000 + $32,600 = $224,600.
Now that we have a goal, we need to check whether or not it is realistic, which is the first place people fail. Here are the questions to ask:
a.) Assuming that my goal involves my income growing, has it ever grown by this percentage in the recent past? For example, if this is a 30% growth rate, but I’ve only ever achieved 15%, I may be being unrealistic. This can be countered by the answer to the next question.
b.) Do I have a sales forecast or any type of company budget that shows how I will generate sales and generate enough profit to meet my growth rate? If the answer is “no,” that’s a problem—I really have no plan. If “yes,” …
c.) If I have a sales forecast/budget, is it realistic? Meaning, applying the same criteria—has the company ever grown by the amount forecast in the budget? If so, great! If not …
d.) Do I have my key team members’ (e.g., sales manager) true buy-in and alignment on the plan because I am going to need them to execute?
If you aren’t feeling good about any of the preceding questions, you likely do not have a realistic plan. My recommendation would be to reset your goal to something more realistic and start laying the groundwork for the next year and the future.
For example, if I need a 30% growth rate but can’t answer favorably to any of the other questions, I might adjust my goal to a 15% growth rate if I have achieved that in the past and feel confident about it. Using the $224,600 example, if you achieve the 15% growth rate, you’ll fall short by around $5,000. Commit to saving the extra $5,000 by redirecting existing spending to savings (e.g., eat out less, cut a few subscriptions).
Regarding question (d)—“Do I have my key team members’ true buy-in?”—many business owners would nod their heads and say, “Of course!” However, what they often have is a bunch of yes men and women agreeing with them, not true buy-in. When things fall short, you’ll often hear this excuse:
“Well, that plan wasn’t realistic anyway, but didn’t we do well growing xx% over last year? Now, where’s my bonus?”
This will likely send the business owner into a blind rage.
Here’s your gut check: if your team created your goal without your input, it’s probably pretty good. By no input, I mean literally no input at all, not “that’s not enough; it needs to be bigger” type input—literally no input at all.
If, on the other hand, you ask the following question (or some version of it):
“Okay team, would you be willing to risk your job (or 50% of your paycheck) on the achievement of this plan?”
You’ll get your real answer. If the answer is “yes,” you have a good plan. If “no,” you don’t. Let them know you don’t intend to follow through on the risk, but they need to go back to the drawing board and produce a “yes” plan.
If, for some reason, they produce a plan that is lower growth than the prior year (or flat), you have the right to ask them why that is. If they have no reason other than conservatism to save their jobs and paychecks, you should request they be more realistic. You also have the right to say, “Then everyone knows the consequence, right? You’ll make less.” At least this way, you’ll have buy-in versus sandbagging.
But you will have a realistic plan.
Addressing BHAGs (Big Hairy Audacious Goals)
Right now, the naysayers and executive coach types reading this are probably saying, “But Adam, what about the BHAG or the stretch goal? Aren’t you selling yourself short?”
Look, I don’t believe in BHAGs for one-year goals. I believe in achievability.
For example, if I were running a marathon and set a SMART goal to “run Boston next year,” here’s how I’d approach it:
- If I already had a track record of running marathons and my current times were 30 seconds to 1 minute per mile off from the qualifying pace for my age group, I’d say it’s possible.
- If I’d never run a marathon before and my 5k times predict a 5-hour marathon pace, it’s a BHAG, and I’m setting myself up for failure.
I’ve never heard of anyone going from a 5-hour marathon pace to a Boston qualifying time in one year. It’s more likely I’d get frustrated and quit. I’d need a more realistic goal.
If, in the same scenario, my race prediction is a 4-hour marathon, I’d have a stretch goal. But for it to be achievable, it would need to be my top focus above everything else—family, work, etc.—because it’s going to take a lot of training. If I can’t dedicate that kind of time, it’s not realistic.
Save your BHAGs and stretch goals for three-year or ten-year targets, not one-year goals.
Ensuring Company Health
We aren’t quite done yet. The last check for realism is ensuring your company will remain healthy while pursuing your goal.
To do this, evaluate the balance sheet and liquidity measures:
- Cash Reserve
- Debt Coverage
Cash Reserve
If your budget passes the realism test, it must also allow you to build a cash reserve. Here’s what I mean:
Assume you have a solid plan that meets all the criteria. However, your company bank account currently resembles a barren cupboard. You need at least one payroll in the bank—our minimum cash reserve recommendation at BGW.
For example, if your payroll is $100,000 and your current bank account is at $5,000, you need to redo your plan to reach at least $100,000 in reserves before prioritizing personal retirement or savings goals.
“But Adam, what about all those books I’ve read about paying myself first?”
I get it. But if you go bankrupt, you won’t be paying yourself at all. Ensure you have a minimally viable company first. Personal savings can be temporarily paused, and you can dig into household spending for savings if necessary.
If you already have payroll in the bank—congratulations! Most businesses operate comfortably with reserves between one payroll and three months of overhead. If you’re a people-focused business (like a CPA firm), one month’s payroll is sufficient. For inventory-heavy businesses, aim for a reserve closer to three months’ overhead.
If you find yourself in this position, examine where your cash is going as a company. Trust me, you’re leaking money somewhere.
Debt Coverage
Debt coverage measures whether your company generates enough cash to meet its obligations. To calculate:
- Sum all principal payments on company debt (leases, credit cards, loans, etc.). For lines of credit, divide the outstanding balance by five to approximate normal debt.
- Sum all your distributions (e.g., taxes, personal).
Multiply these amounts by 1.25. This is the minimum profit your company should generate to provide a cushion of 25%.
For example, let’s assume a goal of $224,600 in personal income and $75,000 in debt. You’d need:
- $300,000 in profit before taxes (to cover debt and income).
- Assuming a 25% tax rate, profit before taxes would need to be $400,000.
- For a safe plan, aim for $500,000 in profit ($400,000 × 1.25).
If your plan shows this level of profit, you’re good to go. If not, revisit your plan.
If your profit forecast is between $400,000 and $500,000, it’s a judgment call. Proceeding with this level of profit requires rock-solid systems and knowing exactly what to cut if you fall short. If you aren’t comfortable with that level of risk, go back to the drawing board and adjust your expectations.
If you hit your plan, the extra profit might still be available—you just need to wait until later in the year (e.g., Q3 or Q4) when you’re absolutely certain the money is there before paying yourself the surplus.
Step Two: Make It Actionable!
Now that you have a realistic goal, it’s time to generate the cash to achieve it. The good news? The more effort you invest in planning, the easier it will be to take action.
Here are the key areas to focus on:
- Taxes
This is often overlooked but can be a major source of cash for business owners. While it may sound self-serving as a CPA, I regularly see new clients who have overpaid taxes due to poor setup or missed deductions.
Start by ensuring your tax bill is as low as legally possible. This can free up cash for your financial goals.
- Accounts Receivable
Be mindful of how generous you are with extending credit to customers and stay disciplined in your collection efforts.
Monitor your Accounts Receivable (A/R) days monthly. If they are increasing, take immediate action. At the start of the year, set a goal to improve your A/R turnover by reducing days outstanding. There’s rarely a good reason for receivables to go beyond 45 days in any business.
- Sales
A predictable sales process is essential. If your sales process relies on the gut instincts of a salesperson saying, “Hey, they’re gonna buy,” you don’t have a process—and therefore, no predictability.
At a minimum, track these three metrics:
- Number of qualified leads: Define what qualifies a lead.
- Close rate: Of your qualified leads, how many are closing?
- Time to close: How long does it take to move a prospect through the pipeline?
With these metrics, you’ll have a clear picture of your sales pipeline. For example:
- If your average deal size is $10,000, and you need $500,000 in new sales, you need 50 deals.
- If your close rate is 25%, you’ll need 200 leads to close those 50 deals.
- If your average time to close is six months, and you don’t have enough leads in your pipeline to close the gap, you’ll need to:
- Generate more leads,
- Shorten your time to close, or
- Increase your close rate.
If none of this is in place, you’re flying blind, and your sales efforts lack discipline.
- Pricing
Ensure that your pricing strategy aligns with your net income goals. Don’t fall into the trap of assuming gross profit equals success. A job might have gross profit, but once overhead is applied, you could actually be losing money on the deal.
- Expenses
Expenses should grow at a rate proportional to your revenue growth—no exceptions.
For example, if your revenue is projected to grow 15%, but labor costs are projected to increase by 25%, ask yourself why you’re accepting lower labor efficiency than the prior year. There could be valid reasons, but you should challenge any discrepancies and ensure there’s justification, not just “everyone worked hard and deserves a raise.”
Monitor and Adjust
By focusing on these five areas and monitoring them quarterly (or monthly, for most items), you’ll be well-positioned to achieve your goals. Taxes are the only item that may be sufficient to review quarterly, as monthly reviews could be overkill.
Yes, I would bet my job and my salary on this plan. It works. I know it works because I’ve seen it succeed time and time again for myself and my clients.
The question is: do you have the stomach to do it?
Download our FREE eBook now to get started.
