Step 1 to driving your profitability and cash flow higher this year begins with the realization that your future should be brighter than your past. Your business should perform better this year than last or you are going to struggle to create a brighter future for yourself and your team.
Defining your goals and targets is the ideal way to kick off a brighter financial future. It is the beginning point of the Monthly Financial Rhythm.
The Monthly Financial Rhythm is the TARGET – MONITOR – ADJUST cycle.
It's about setting operational and financial TARGETS, MONITORING projected and actual financial results, and making ADJUSTMENTS in strategy and execution inside the business when results differ from the target or expectation.
It's a monthly process meant to speed up and improve your decision-making ability. A fast feedback loop makes it possible to quickly identify strategies that need to change when financial results are not in line with expectations.
Setting Financial Goals and Targets
The TARGET portion of the cycle is made up of the key financial and non-financial goals that drive from the vision and strategy of the company. A company in restructuring mode would have different targets than a company trying to scale and grow. The targets can change as well depending on short-term financial goals.
For example, one quarter you might have specific goals related to collecting receivables faster. Another quarter might include a focus on reducing a certain expense category. There will generally be 3 to 5 targets at any time. But the mix of targets or goals will vary during the year.
The A-3 Targets Exercise
I use the A-3 Targets Exercise to identify your financial goals or targets. I have found this to be incredibly effective with entrepreneurs. The A is for setting the annual financial targets. The 3 is for setting the 3 month targets that lead to achieving the annual targets.
The process begins by recognizing that your future should be brighter than your past.
Or at least, that should be your goal. You want to tap into the hope that motivates and inspires you to always work on becoming better at what you do. That includes your business.
The planning exercise begins with asking a version of The Dan Sullivan Question:
"If we were having this discussion one year from today, and you were looking back over that year, what has to have happened in your business for you to feel happy about your progress financially?"
The beauty of this question is it temporarily removes you from the day-to-day issues you are dealing with in your business. It encourages you to define what would make you happy from a financial perspective. It puts you in a place to look back and consider what needs to have happened in the business to make you happy.
It provides you a way to "begin with the end in mind" as Stephen Covey would say.
It stimulates specific questions like:
- What level of profitability would make me happy?
- How much money will be in the bank?
- Has the debt been paid down?
- What's the net worth of the business?
- How much could the business be sold for?
Those are some of the questions that come to mind when you put yourself one year out. It helps you get a sense for what you want to have accomplished, and what would make you happy with your progress financially.
The next question to answer is:
"Specifically, what dangers do you have now that need to be eliminated, what opportunities need to be captured, and what strengths need to be maximized."
Or, you could ask that same question this way:
- What problems exist now that need to be eliminated?
- What tools or capabilities are missing now that need to be implemented?
- What strengths exist now that need to be maximized?
These questions help you identify the HOW of achieving your financial targets. How are you going to deal with the problems in your way? What tools or processes are missing? And which strengths need to be enhanced or used more wisely to help you achieve your financial goals?
Creating the Future
As you go through these questions, you're painting a picture of what financial success should look like for you. What would make you happy as far as what the business needs to accomplish for you as the owner, or for the shareholders of the business.
The end result is you will have 3 to 5 annual goals, or targets, identified. And the same thing for your 3-month financial targets. This is step 1 of the Monthly Financial Rhythm.
These targets will then flow into the MONITOR portion of the Monthly Financial Rhythm.
Now that you have set your financial targets, you need to MONITOR your progress against those targets every month. The tool and process for making that happen is the Monthly Confidence Package.
And the third portion of the cycle is ADJUST. Every month, you need to review targets against actual and forecast results to decide if you need to make changes in the business to achieve your targets.
That's the secret to creating financial success every year in business.
Remember, your future should always be brighter than your past.
Controller's Conference Reminder
The 2014 Controller's Conference is going to be a fantastic opportunity to learn and grow. I will be presenting a session on using financial forecasting and projections to enhance your influence and credibility in your organization.
Dwayne Kolly, of the Business Bank of Texas here in Austin, will be presenting a great session on reducing your risk of fraud. Here is the session description:
Reduce Your Risks: Being Prepared for Fraud
Dwayne Kolly, CFO
Business Bank of Texas, N.A.
Let's face it, if your business account has money in it, there are people who want it. They will figure out whatever way they can to take it away from you. While you're busy 24/7 providing superior customer service or cranking out the world's best widgets, there are folks who have nothing better to do than think up ways to separate you from your hard-earned money. We could be talking about folks who are thousands of miles away, or they may just as likely be inside of your organization.
Here's more information about the conference. It's Wednesday, September 24, 2014. I'd love to see you there.
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