Reach Your Next Revenue Goal
Reason #13 for Implementing Profit First in 2024 - Reach Your Next Revenue Goal
How do you set goals in your small business? What metrics or model should you follow for setting and reaching goals?
This answer is different in every industry, profession and for each individual entrepreneur. Talking money is a highly subjective and emotionally charged subject, hence the recent buzzword catch phrase “money mindset”. Yes, the way you were raised to think about and utilize money can have a deep and lasting impact on your life!
So how does one go about setting a goal around money – let alone reaching it?
Setting and achieving revenue goals is essential for the growth and sustainability of any business. However, without a clear strategy, these goals can seem elusive. By combining the Profit First method with SMART goals, you can create a powerful framework to reach your next revenue milestone. In this blog post, we’ll explore how to align these two approaches for maximum impact.
“SMART Goals – Specific, Measurable, Achievable, Relevant, and Time-Bound. Defining these parameters as they pertain to your goal helps ensure that your objectives are attainable within a certain time frame.”
Components of SMART Goals:
Specific: Clearly define what you want to achieve.
Measurable: Determine how you will measure progress and success.
Achievable: Set goals that are challenging yet attainable.
Relevant: Align your goals with your overall business strategy.
Time-bound: Establish a timeline for achieving the goal.
If this is your first time hearing of the Profit First Method, let’s take a moment to review that.
Understanding the Profit First Method
The Profit First method, developed by Mike Michalowicz, is a financial management system that flips the traditional income-expense=profit formula. Instead of subtracting expenses from income to determine profit, Profit First advocates for setting aside profit first and then using the remaining funds for expenses. This approach ensures that profitability is prioritized and forces businesses to be more disciplined with their spending.
Key Components of Profit First:
Income Allocation: Revenue is separated from all other transactions, and is distributed into separate accounts, on a regular basis (weekly or monthly) for Profit, Owner’s Pay, Taxes, and Operating Expenses (OPEX).
Profit Focus: By prioritizing profit, businesses ensure that they are consistently building a financial cushion, and creating a culture of sustainability through controlling profit.
Owner’s Compensation: By next designating a “piece of the pie” for the owner of the business, the owner has more than the profit account to use to their benefit. Thus ending the cycle of self-sabotage or constant sacrifice when cash runs thin.
Tax Liability: By accurately planning for tax liability as ratio from every dollar of revenue that comes in, your business is set up for success when taxes are due.
Operating Expenses: Controlling expenses based on what remains after ensuring profitability, owner’s consideration and tax liability, keeps the business “lean” and realistic based on the stage of business and current revenue trends.
Combining Profit First and SMART Goals to Reach Your Next Revenue Milestone
Now, let’s combine these two powerful approaches to create a roadmap for achieving your next revenue goal. Traditionally, there are two ways to make a business “more profitable” — raise revenue or reduce expenses. In Profit First, we coach clients to audit their expenses to right-size OPEX as a ratio of their current revenue bracket.
By forcing yourself to realize revenue as a ratio of the foundational accounts — allocating funds based on certain a % of revenue — we tap into the power of Parkinson’s Law. Traditionally, Parkinson’s Law is the premise that “work” expands into the time allotted for its completion — when a task is procrastinated, it is completed more quickly under the pressure of a deadline. Alternatively, if a generous timeline is given, a task will take longer. Extrapolating this to the Profit First method replaces “work” for money (cash) — meaning, the more money we have access to, the more money we spend. If we limit the access to money, by designating a particular bank account for a particular purpose, we are forced to find a way to make it work.
So, your first SMART Goal may look like this:
Specific: Increase Profitability
Measurable: by 3%
Achievable: by reducing OPEX 3%
Relevant: to create sustainability
Time-bound: in the next 90 days
Rinse and Repeat. Every Quarter, we get closer to your goals — just 1% at a time!
Another example of a SMART Goal with Profit First:
Specific: Increase Revenue
Measurable: by 10%
Achievable: by discontinuing discounts
Relevant: to match inflationary trends
Time-bound: in the next 30 days
And another:
Specific: Improve Owner’s Pay compensation
Measurable: by weekly allocations of 30%
Achievable: as evidenced by historical trends of Owner’s Draws
Relevant: to fairly compensate the business’ hardest working employee
Time-bound: in the next 90 days
This owner needs to stop the feast-or-famine habits of self-sacrificing their own pay!