Hello and happy new year.
It’s my first day back at work. Officially anyway. I have been working on and off in some form over the break, in between the sunshine, beach walks, reading books, and time with family and friends. This is the time of year that I try to get really clear about what I’m wanting to achieve for the next calendar year. So I’ve taken the time to reflect on last year and to check in with the intentions and goals that I set at the beginning of last year. It doesn’t really feel like work, to be honest. I get a real kick out of it and I enjoy the process.
I especially look at the financial performance of my business and whether I hit my targets or not. I didn’t, FYI, but I wasn’t far off. My financial goals are always stretchy, so I’m not unhappy about where I got to at all. Even if I didn’t hit my target I’m still further ahead of where I would have got to if I hadn’t set a goal at all.
Part of my yearly planning ritual, which then trickles down into my monthly, weekly and daily planning rituals, is to set financial targets. How much revenue do I want to generate? Sales. Business income. How much from the different channels of my business? And because the saying “Revenue is vanity, Profit is sanity” is so very true, I also set targets for how much I personally will take home.
In my service-based business as a coach, I have a goal to keep 70% of revenue as income for me. So that means that I need to keep track of my net profit figure each month. And I need to be mindful about where I’m spending the business’s money.
Your own metrics will vary, depending on where you’re at in your business journey and what you’re selling. If you’re just starting out then maybe you’re spending a greater percentage of revenue as you invest in marketing, or your business systems. Conversely, as my business grows I should find that the percentage that I keep increases, as some of my expenses are fixed, and won’t grow at the same rate as my sales.
If your business has staff, contractors, or sells product, then these numbers will be different again. In this case your gross profit % becomes an essential number to track, along with revenue and expenses.
Note that I said ‘the business’s money.” This is a mindset that makes a big difference, when you recognise that your business is a separate entity to yourself. If you want to grow your business into more than just a job paying dollars for hours, this is a crucial distinction. Your decisions are on behalf of your business and need to reflect what is in the best interests for the business.
This means that you invest in marketing, professional development, systems etc. The sustainability of your business depends on all these things. This also means that you don’t take out more drawings or wages for yourself than the business can realistically afford.
Of course, you are integral to your business. Of course you are! This is your business, you get to create it so that it works for you. And in order for it to work for you, the business needs to be financially healthy.
Do you know what numbers you should be tracking? Have you created a budget for the year so that you know where you’re heading, and do you track budgeted vs actuals?
When I had my bookkeeping business I had contract bookkeepers working for me and I was able to track profitability, or gross profit, by bookkeeper. My bookkeepers were a cost of sale. I knew what gross profit I wanted to hit each month, I knew what my expenses were, and I knew how much I wanted to take home. All of these key metrics were diligently tracked each month.
This is also a good time of year, or at end of your financial year, either is fine, to look at where the money’s going. It can be really easy for subscriptions and monthly payments to go by each month without us registering whether we’re getting value from those costs. Invariably I cancel a couple of things and review other costs at this time of year, to see if I’m getting the best value or the best deal. I’m looking to see if there’s any way I can reduce expenses.
Have you made it a habit to look at your business performance each month, and to set financial goals for the coming month?
How much revenue do you want to generate this month. Remember, make it stretchy. Look at your prior months’ revenue, or your average revenue, and increase it a bit. That’s your target. Write it down.
Next, make a list of all your existing clients, and of work that you know is on the books or in the pipeline for this month. Put a $ value beside each one to represent what you expect to receive from each client.
Are there any other forms of adhoc business income that you usually receive? From training or project work? Subscriptions or memberships? Write them down too, so long at they’re realistic, along with a $ value.
How much is the gap? If your financial goal was a bit stretchy then you will likely have a bit of a gap between what you know is coming in, versus what you want to be coming in. Here’s where you need to ask the question: “Where is the rest going to come from?”
Here’s where you can brainstorm ways that you can fill the gap. Is there a potential client that you need to follow up with? Is there a job you’re in the middle of but, truth be told, there’s no set deadline so you’re meandering a bit. Can you make the effort to complete it and get it invoiced? What else can you do?
A quick note here; if you’re not used to looking at your financial reports each month, when I talk about tracking your revenue I’m talking about invoices generated, not cash coming in. The difference between cash and accrual is important, but is a topic for another day. Just remember that the numbers above should relate to your invoicing for the month, your sales made.
I invite you to establish two valuable habits each month.
- Set financial targets for the month relating to sales and net profit. How much money do you want to make this month?
- Consider where the sales are going to come from to enable you to reach those targets. How will you fill the gap?
Do this every month, along with reviewing your other financial metrics, such as cashflow, debtor and creditor ageing reports, etc., and it will make a huge difference to your business.