If an individual has financial goals, it should not be any different for a business. From savings to investment, personal finance deals with the idea of having a set of goals to achieve a set target. Financial goals are important both for your short-term needs and long-term aspirations. For a small business, it should not be any different. However, not many realize or understand what these goals should be. Let us take a look at some basic financial goals that can prove very handy for your business.
Micro and the macro
The first essential that every business should have is to have micro and macro goals. Goals are essential so that you have a clear idea about what you are working towards, without which much of your business effort may be chaotic or ad hoc. Financial goals can be micro in nature, which can be very short-term in nature. On the other hand it is important to have macro financial goals that look at long-term objectives of the business. This can be aspects like how to increase revenue, increasing margins and cutting cost.
Along with this it is important for a business to have a vision and mission statement. While both vision and mission are generic and not necessarily financial in nature, it does have significant bearing on how a business is to be conducted. For example, if the mission statement is to produce “fresh vegetables to every home” the business has to be structured in a way that fresh vegetables are indeed delivered.
Get a grip on costs
Cost is one thing that a business can control. We hear about a company’s burn rate, which is essentially the rate at which you are losing money. When your operating expenses are more than your revenue, a company is suffering from negative cash flow. The idea should be to not burn money at all, but to have a positive cash flow. Reduce operating expenses that can be causing a drag on your revenue. This can be unproductive production practices, high cost of shipping, rentals and even employee salaries that can be a product of excessive headcount. It should be your stated goal to keep reducing costs, so that even at times when revenue stagnates, the business does not feel the pressure.
As with any loans that you may have as an individual, the business will also have debt. It is very important that you service all your debt regularly and pay the amount due every month, quarter or yearly as the case may be. If you let interest pile up on debt that has not been repaid, it can quickly become a source of major financial problem. Also, as the case with individual debt, not servicing it on time can impact the credit rating of your business. Businesses that are good with repayment also find it easier it raise additional debt when the need arises.
Manage cash flow
Managing cash flow should be one of the most important goals of your business. Many confuse cash flow with being profitable, but this is not the case. Cash flow is all about the amount of money coming into your business versus what is leaving your business in terms of payments. If the amount of money leaving your business is less than what is coming in, you are termed as cash flow positive. Different things like buying and managing inventory, paying suppliers, paying salaries of employees amongst others take cash away from a business. Every small business must ensure that inventory management is in place, receivables against invoices is expedited and make payments closer to the due dates. In the end it should be about cutting costs and controlling cash flow.
If managing cash flow is very important, being profitable should be the final goal and this can happen if you continuously look at improving your margin. This can be done by increasing the price of the product or services, but this may often be difficult in a price sensitive market. It would then be important for a business to find other avenues to increase margins. This can be through lowering the cost, like negotiating a new deal with your supplier or letting economies of scale play a part in your production process.
It can also be around reducing expenses on salaries, which can be done by resorting to flexible hiring and employing your staff as consultants. You may also look at cutting your marketing and advertising expenses or find new customers altogether. At the end of the day it should be your constant endeavour to better margins, which in turn will lead to profitability.
(The writer is, CEO, Wishfin.com)