In order to grow a business, it is important for the owner to set goals. Goals help you stay focused on what matters most and keep you moving towards your ultimate goal.
The webinar goals and objectives examples is a webinar that will teach you how to grow your business by setting goals.
We all have company objectives, but we often overlook the need of properly defining these objectives. This is particularly true when it comes to establishing financial objectives for small companies, as financial goals are often either loosely stated or dependent on assumptions. Many small company owners maintain a mental list of objectives, but understanding why you should establish goals, what kind of goals to make, how to monitor them, and what you can do with this information is critical to learning from your goals and growing your business via goal setting.
Tom Misson, Vice President and Senior Business Leader for Mastercard Worldwide, who oversees the US Small Business sector, joined me for this webinar. We’ll talk about how well stated objectives may help you develop your company and achieve financial success in this article.
The whole audio and slide presentation may be heard above, and the entire transcript is below:
Sabrina Parsons (Sabrina Parsons): Hello, everyone. Sabrina Parsons, CEO of Palo Alto Software, welcomes you. I’m going to present you to our MasterCard guest. I simply want to give everyone a chance to join up. I know how difficult it may be to go from one meeting to the next. I’m just going to give it another 30 seconds or so, and then we’ll get started.
Meanwhile, I’d want to go through some housekeeping so you’re aware of how to engage with us. You will all be silenced, attendees. This is so that we don’t receive too much outside noise. For everyone else, people’s computers or environments may be extremely loud at times.
If you want to engage with us and ask questions, look for a small area called Questions on your Go To Webinar toolbar, which is typically on the right side of your screen. This is where you may really ask the question. Allow yourself to ask questions as they arise.
We have Peter Thorsson from BizDev here at Palo Alto Software who will be facilitating those questions for myself and Tom from MasterCard. Our plan is to answer the majority of the questions at the end of the webinar, but there may be some questions that are just asked and are perfect for the content that we’re giving at the time, so we may answer a few questions throughout. Don’t be alarmed if your queries aren’t addressed immediately away. At the conclusion, we’ll attempt to go through all of the questions. The other thing is that we’ll make the webinar available in a recorded format to everyone who registered for it after the fact; we’ll e-mail it to you so you’ll get all the slides and all the content afterwards, so you can share it with anyone else, and if there are any questions that we don’t get to, we’ll try to address them in the content e-mail.
That gives you a good idea of how we’re going to approach the webinar today, and with that, I’m going to get right in and welcome you to our Live Plan and MasterCard webinar. “Grow Your Business by Setting Financial Goals” is the subject.
We’re going to show you how to create objectives, why you should set goals, and which ones you should monitor. As a result, we’ll go straight to work. The first person I’d want to introduce is Tom Misson from MasterCard. In the small company sector, he is vice president and senior business leader for U.S. Commercial Products. We’re delighted to have you join us, Tom.
Misson, Tom: Sabrina, thank you very much. I appreciate the welcome and am delighted to be here. Today, Sabrina and I believe we have some fascinating information to share with you. I believe everyone is aware of today’s webinar subject, which is to help you achieve your financial objectives, so let’s get started.
Sabrina Parsons: That’s fantastic.
Misson, Tom: I’ll present the first set of slides, then Sabrina will take over, and I’ll [inaudible 3:33] as we move through them. The first slide reads, “Goals Aid Financial Success.” Why do we say it, exactly? Goals are essential because small companies, regardless of where they are in the business cycle, need them. Goals are necessary because they keep things moving. Goals assist small companies in sustaining their success, which is critical since one of the primary causes for company failure is a lack of planning. They aren’t thinking about their objectives. Goals are just thoughts that occur to them when they are halfway through a task, and this is not the best approach to attain achievement.
As a result, it’s critical to take out time to consider your objectives. Think about things in terms of objectives to create an action plan for what you want to accomplish. Make a firm commitment to achieving those objectives, and don’t punish yourself if you don’t succeed. What matters most are your best efforts. I’m not sure if you want to say anything, Sabrina, but those are my thoughts.
Sabrina Parsons: No, I think Tom covered it now and ahead of time, and I think for all of you who are listening, the one thing I hear a lot from small business centers is, “Oh yes, I’ve got the list, they’re all in my mind,” and I believe Tom is correct.
Goals can assist you in achieving your success, but you must think about and define them with purpose. Having them all in your mind may seem like, “Yeah, I’ve got it,” but it’s not the same as really writing it down in black and white.
Misson, Tom: Let’s move on to the next slide. Why do goals help people make better choices, according to the slide labeled “Goals Help Make Better Decisions”? Basically, it necessitates thinking, which is a challenge for tiny companies. They’re always doing things to keep their company running, and although the thinking part may be tough at times, it’s critical. It’s significant since it’s a necessary component of good management. It’s an important element of what operating a company should include, and it’s easy to see why objectives assist us make better choices.
The thinking processes are straightforward. What do you hope to accomplish? What are the many options for achieving your goals as a company owner? How long will it take you to accomplish those goals, and what are the consequences of failing? Those are the kinds of things that may help you make better choices and are crucial in starting and developing a company.
Sabrina Parsons (Sabrina Parsons): I believe Tom is providing you with that broad picture to assist you comprehend, and it relates to what I said before about the objectives in your mind. They’re also simpler to shift about in a really vague manner if they’re in your mind.
But if you write things down and then ask yourself, “Did I achieve my goal?” Why didn’t I achieve my objective? “How can I achieve my objective?” then really get to the underlying assumptions that led you to write out those objectives.
What was it about your company that made you believe you’d be able to generate this much revenue, but you didn’t? Can you go in there and see if there were any assumptions I made that were a little off?
It’s wonderful to have Tom from MasterCard here because I believe he’s providing you that very broad picture of what you need to accomplish, and too often, small company owners feel like they’re doing a million things at once. Because your plate is piled so high, the essential tasks, such as writing down your objectives and then utilizing those goals to make choices, frequently slip off your plate.
Tom Misson: All right.
Tom, go ahead. Sabrina Parsons:
Misson, Tom: I was going to say that I’m going to hand this on to you.
Sabrina Parsons: All right, that’s fantastic. Goals not only help you make better choices, but they also help you avoid making decisions based on gut emotions, which many of us who operate small companies understand. You may have to rely on gut feelings at times, but they should be well-informed gut feelings.
You don’t just make decisions without looking at data, but if you don’t write down your goals, don’t understand why you want to reach those goals, and then don’t gather data to see if you’ve achieved your goals, then we’ll get into more detail later on what goals are and what kinds of things you should set as goals because we can get pretty specific, but if you don’t put goals down, don’t understand why you want to reach those goals, and then don’t gather
Misson, Tom: The only thing I’d want to add is that sometimes your gut instinct isn’t so much a gut instinct as a sense that comes from what I’d call business seasoning, right?
There is a distinction to be made between having a gut feeling about something and having a belief based on experience and understanding, as well as just being a member of the business community. The latter, business seasoning, is acceptable as long as it is backed up by facts. If you act on your gut instinct without thinking through the implications, it may lead to a very negative result, as you said.
Sabrina Parsons: That’s right. So, the second thing that occurs when you manage and make choices based on gut emotions and not defining very clearly what your company objectives are and not establishing your goals is that you manage and make decisions based on gut feelings, which are often based on incorrect assumptions.
Of course, it was impossible not to use the Dilbert comic strip here because Dilbert is great at all kinds of things like that, and I especially like this one where not only is he talking about unrealistic assumptions at the end, but the conclusion is basically, “Oh yeah, we know that that isn’t there, but just assume that it is.”
While it’s amusing, it occurs much too frequently when we operate small companies and don’t take the time to sit back, look at the big picture, establish the objectives we want to accomplish, and then gather the data and understand why those goals were set in the first place.
Because when I do that with small companies, we usually start to unearth one, two, or three incorrect assumptions. I mean, small company owners tend to be very excellent at knowing their business because they’ve been operating it for a long time, but I always find one, two, or three bad assumptions. Things that a small business owner believes is going on with their company, and since they believe it, they continue to believe it, and it almost becomes a rule objective, right?
A dog boarding business is an example of a company with whom we collaborated. The owner of the company was convinced that the dogs she boarded were her most profitable customers. While the customers who boarded dogs brought in the most money, boarding dogs is very costly, thus the real margin on dog boarding was much lower than the margin on dogs who just came for doggie day care throughout the day.
She didn’t realize she had this totally wrong assumption about the profit centers of her business until we sat down and I made her go through all of her goals, set her goals, and then come back a quarter later and looked at did you achieve your goals and let’s look through where you didn’t achieve your goals.
That’s what happens when you trust your intuition and make incorrect assumptions. You end up essentially constructing a reality for your company that may or may not be a reality, which is why some business owners feel trapped after five or ten years in business. They don’t feel like their company is expanding and they don’t know what to do, but what they don’t realize is that if you take the time to establish your objectives, you’ll start to see places where your business can develop. It isn’t an insurmountable Everest-sized peak that you must scale. You begin to locate the little mole mounds that you may assault and deal with.
Tom Misson: Yes, Sabrina, it seems like what you’re saying is that the lesson from this slide is that you shouldn’t get too emotional and persuade yourself that a conclusion or an opportunity that’s just ringing in your mind is so powerful and compelling—make sure the evidence backs it up. The dog boarding example, in my opinion, is excellent and totally on point.
Sabrina Parsons (Sabrina Parsons): We’ll go on to the next slide right now. We’re experiencing some issues with this, so please accept my apologies. What objectives should be set? We were going to go into some details about setting objectives, as I said. The word “goals” conjures up images of a grand vision. What are the objectives? When you’re a child, your objectives are to graduate from high school and go to college, or to go into this sector, or to obtain that job, or to earn enough money to purchase that home. Some really big-picture objectives.
Consider your company objectives in the same way that you would establish personal goals for yourself, such as health and wellbeing. I prefer to think of the objectives you establish for your company and the goal-setting process as a business version of FitBit. Anyone here have them, or the Nike Fuel band, or any of the other trendy bracelets that monitor your activities and help you become active and healthy? They don’t function very well unless you establish objectives for yourself. Unless you explicitly tell your Fitbit or Nike Fuel band that you want to reduce weight, drop body mass, and run a marathon.
You basically outline your goals, and then the FitBit or the Fuel Band or any of the other competitors, whichever ones you have, starts to assist you and track what you’re actually doing, and then tells you, “You’ll never be able to do that unless you increase your activity by this, unless you start going four days a week,” and so on.
It’s the same way in your company. Your financials will just tell you what occurred if you don’t establish objectives. They don’t explain why or what you need to do next to accomplish your objectives. Everyone should have financial objectives.
This implies you’ll need to establish sales and expenditure targets. What am I going to sell for? What am I going to spend my money on? We strongly advise you to consider your product lines in terms of those main categories. Set a sales target or a sales estimate with no more than a hundred line items. It’ll irritate you to no end.
Consider no more than ten categories, ideally five or less, and place your company in those categories. Then establish objectives for those categories. For example, in dog boarding, don’t say luxury boarding, tiny dog boarding, or weekly boarding; just say dog boarding. That’s probably plenty, and as you start to put your company online, you’ll see where you need a few additional information. However, you should not establish objectives for a hundred things since you will never be able to handle them.
So consider your sales targets. For the first year, I would recommend setting sales targets on a monthly basis. If your fiscal year and calendar year are the same, you may want to limit yourself to monthly sales targets until December since we’re currently in May. In general, you’ll want 12 months of sales objectives for the fiscal year you’re presently in, and you’ll want to establish those goals a few months before the fiscal year begins, and then you’ll probably want two more years of goals simply to give you a broad picture of where you’re heading. However, such objectives should only be measured in years. You don’t have to go through the months in great detail. You have a three-year projection with your objectives, including monthly forecasts for the first 12 months and annual forecasts for the following two years.
It’s the same with expenditures. Again, don’t set 300 cost lines as your objective. Consider the following broad categories: pay, marketing, sales, rent, and utilities. If you run a company with a lot of cars on the road, gas is likely something you’ll want to keep track of. Consider the items you keep track of in your mind as a company owner.
Every small company owner I speak with has a mental list of things to keep track of. Those are the objectives you set for yourself. They’ll all say, “Oh yes, yeah, I know I’m in problem if my gas bill is above this, and I’m in danger if I don’t have at least 30 customers each month.” Those are your objectives. Take them out of your mind and write them down in black and white, ideally without using a pen and paper these days. Using a software tool, such as Excel or a spreadsheet, is preferred. Our business offers some excellent tools, but it makes no difference what you use; the important thing is that you utilize anything.
You should do the same thing with gross margins, and if you don’t know what your gross margin should be, you can look it up online. You may look for your industry’s SIC code or NAICS code, as well as the industry’s typical gross margin.
Then you may examine your own and determine where you stand, as well as create objectives based on that knowledge. It’s all based on data, and it could be, but gross margin is one area where I’ve helped a lot of businesses make a lot of money by recognizing that they were paying too much for cost of goods, or that they weren’t looking at the cost of goods at all, so they thought the gross margin was better than it was, but the profit wasn’t what it should have been. So give it some serious thought. The gross margin is the difference between sales and the cost of products; this is your gross margin. That’s how much money you earn on each item before you include in all your other costs.
You should constantly have financial objectives. How much money do you need to keep in the bank at all times to be safe? You must have your safety cushion on hand. Your AR (accounts receivable) and AP (accounts payable) departments should establish objectives for how long it will take to collect money from customers and how long it will take to pay them.
You don’t always have an option in accounts payable. People will tell you, but as you grow your company and build vendor connections, you may be able to stretch that due upon receipt date back to 15 days, 30 days, or even 45 days if you have a good relationship with your vendor. You need to pay attention to it since it has an impact on your bank account.
When it comes to accounts receivable, I often encounter companies with a large number of accounts receivable, with days to be paid average 90, 100, or 120 days. There are certain companies where this will be the case, but there are many, many others where it will be the case because you aren’t aggressive enough with your collections, and by aggressive, I don’t mean rude, harsh, or anything else that will irritate your consumers. All you have to do now is get into the habit of reminding them and double-checking that they understand. That when you say 30, you really mean 30, and that this is simply conducting business, and there are proper ways to do it, but I frequently see something with a little company that they aren’t even aware of. “Oh my God, really?” they exclaim. It takes 90 days on average, but my invoice says 30,” so yes, they may say that, but if you don’t concentrate on it and don’t comprehend it, establish your objective.
Examine your industry’s benchmarks once again. You can use those NAICS and SIC codes to figure out what your industry’s typical days to be paid are, and if your average days to get paid are much longer than the industry’s, you know you can push it back. Customers are accustomed to you paying a little bit quicker, and you know that customers will be OK with it. After all, we’re all people with budgets and bank accounts at home. If you know you don’t have to pay immediately soon, you won’t, therefore let your consumers know, “Actually, I really do mean that 30. Please, if you don’t, I’ll charge you interest.”
Costs incurred directly. That’s how much it cost you to sell. That is something you must comprehend. You must include in all of your expenses and establish your objectives, and here is where those assumptions, both good and negative, come into play. When you pencil everything out, a lot of times people don’t, whether it’s everything they should be putting into direct cost or they’re putting too many things in, and you end up with a hazy gray image of your company.
It doesn’t matter how much we sell at the end of the day if we make a profit. Isn’t it important to all of us as small company owners to know what our profit is at the end of the day? The majority of us aren’t working for a charitable organization. The majority of us are doing this because we have a wonderful service, a great product, and we believe it is beneficial to others, but at the end of the day, we need and want to earn money. We need to earn a profit because we have families to feed, debts to pay, and aspirations to support. You must first choose how much profit you want to make this year, next year, and three years from now, and then determine if those objectives are feasible and how to achieve them.
And, since I know I’ve spoken a lot, I’ll leave a little room here for Tom to join in.
Misson, Tom: Yes, I believe you’ve nailed it. I mean, the point from this slide is to make a commitment, to summarize. Set financial objectives by making a contract with yourself. Don’t depend on what’s on your mind right now, since it’s possible that what’s on your mind right now isn’t the same number you thought of last week. It’s critical to write them down, as you said, to monitor them on a regular basis, and to plan ahead so that you have some strategic stretch goals in mind as well.
Sabrina Parsons (Sabrina Parsons): Fantastic, fantastic. We had a brief discussion regarding sales. Your company is driven by sales. You don’t have a business if you don’t sell. After all, this is one of the most essential goals to establish, and it will influence all of your other financial objectives. Everything else will fall into place after you decide out what you want to sell, so start there. That’s the most essential place to start, and you’ll need to consider some of these issues as you consider your sales objectives. How many are there?
If you’re in the service industry, you may be selling hours. So, if you’re selling folks time, how many hours will you sell? What is reasonable? Last month, how many hours did you sell? Look at your past, whether it’s from the previous month, the previous year, or the whole previous year, since it will influence your goal-setting and forecasting. Based on your history, what is realistic in the future, in the near future?
Pricing is something that many people overlook for a long time. They establish the price and either stick with it or move in the other way. They are always tinkering with their price. Both of these concerns may cause difficulties for your company. You should constantly be keeping an eye on the price. What are your competitors up to these days? What’s the status of your pricing? What is the purpose of your pricing? Do you want to be the cheapest? Do you aspire to be the best in the world? Pricing communicates a lot to your consumers and determines the sales approach. Who are you attempting to sell to, and what is their value and pricing expectation? Consider it and revisit it every year when you prepare your forecast and establish your sales objectives, as well as when you review your price.
Is this the correct price? Use all of the wonderful tools available to test things whether you’re doing anything online or selling online. Try out various prices and see what works best for you. There may be a price that goes up and converts more people, but it’s so cheap that it’s not worth it to you. That you would rather have a higher price because you earn more money that way since each client costs you more money, or that you would rather have a lower price because the conversion of new consumers is so high that you make a lot more money.
Try to conduct some really carefully thought out tests whenever you have the opportunity, and I would suggest testing your price at least once a year, but a couple of times a year is probably a good way to think about it, and every company will be able to test pricing in various ways. Some companies have a lot of obligations when it comes to pricing testing, but if you haven’t increased your rates in six or seven years, it’s time to reconsider. The economy is improving, people are doing better, and now is the moment to take action.
Consider who your most lucrative client is in sales. Like I said, the lady who owned this dog boarding company believed her lucrative clients were the boarders, but it turned out to be the doggie day care customers, right? Those were the individuals that contributed more to the bottom line. Those were the individuals she wanted to recruit more of since they contributed to her earnings more quickly.
Then there’s CAC, or client acquisition cost. Consider who you have to sell to and how costly it is to acquire those consumers when thinking about sales. Now, you’ll get into the real cost of products in other objectives you establish and manage it, but it’s always something to think about when thinking about sales and possibly selling to a different kind of client. Before you go ahead and do it, think about whether or not it’s feasible. Do I have the funds to recruit that kind of client, or should I focus on improving the service I provide to the customers I currently have, for whom I know the cost of acquisition?
Tom, I’m not sure if you have any additions.
Misson, Tom: I’d simply want to add a few of things. I believe you mentioned keeping your ear to the grindstone and knowing what your rivals are up to. There are some excellent tools out there that are very cheap and have just recently come to market that will provide you with insights into how your competitors are doing. I’m not trying to promote MasterCard since there are other options available, but Master Card, for example, offers a product called Market Vision. If you subscribe to Market Vision and take cards as a form of payment, Market Vision will help you grow your company. You may get a feel of how your peers are doing by looking at their profiles. You’ll receive a report on how you’re doing compared to your peers, not just your next-door neighbor, but a group of rivals in your region.
You can get an idea of things like their average buy price and their average selling price. If it’s a retail store, you can get a sense of how many people are walking into it.
You can figure out which days of the week are the busiest. These data may be used to help you establish sales objectives and move your company ahead. You may think you’re doing terrible at the end of the day, but when you look at what your [inaudible 31:40] is doing, you’re probably doing very well.
I believe that seeing what your peers are doing and using some of the new technologies available to get insights into that is also very beneficial.
Sabrina Parsons: That’s fantastic.
Thorsson, Peter: If you don’t mind, I believe we have a query for you both on the client acquisition cost points. Our issue is whether they should include sales, salaries, sales commissions, or any other kind of overhead when determining client acquisition costs. Is it how you obtain that price, or are you simply relying on marketing?
Sabrina Parsons (Sabrina Parsons): That is an excellent question. I know how much this term irritates people since there isn’t a simple response; it depends. It all relies on your company and how you market.
If you sell mainly via salespeople, your customer acquisition cost should be calculated using the basic pay + commission. What will it take to seal the deal? How long does it take to get a response?
How many hours does a salesperson have to work on a transaction, and how much do you pay the salesperson in commission? If you sell mainly online, your customer acquisition cost may be very low.
If you want to know how much it costs to acquire a customer, look at your pay per click online ad expenditure. What does it cost to acquire a client who clicks on a Google ad, visits your site, and then decides to buy? How much do you spend on pay per click each month, divided by the number of consumers that made a purchase on your website as a result of the pay per click funnel?
That one is really very simple, but it’s surprising how few companies bother to check into it. Use that pay-per-click client acquisition cost to figure out how much you spend on pay-per-click advertising. The beauty of pay per click is that you only pay if you get results.
You don’t have to pay until someone clicks. If someone clicks but doesn’t purchase anything, you shouldn’t have to pay. Move on to a new key word or pay less for that key word if you don’t want to pay for that one.
If you sell on a website but don’t use pay per click, your customer acquisition cost will include factors like how much it costs to operate your website, if you have a web developer on staff, and how much it costs to host your site.
Do you have a designer on your team? How many hours per month do they spend on your website, and then look at that to get an idea of the cost of acquiring that individual. Don’t get too caught up in the details. Get a feel of it, run the statistics, and come up with an average.
Then go back and evaluate it every quarter. If you’re making a lot of adjustments, check in with yourself once a month. If you’re selling in a conventional way, you’ve got a retail shop and you run local radio advertising, newspaper ads, and perhaps inserts.
Then, since the employees that work in your shop are generally simply a fixed cost that you don’t have to worry about, your customer acquisition cost for new consumers is typically calculated by dividing your marketing budget by the number of new customers you receive.
Unless, of course, you provide incentives to salespeople on the retail floor, and you have certain salespeople who sell more to new customers, in which case you have a customer acquisition cost if you offer incentives to your retail employees.
It’s not a simple solution, but it’s not impossible to find out in the end. If you have particular questions regarding client acquisition cost, you may ask them during the webinar, and you can always contact us later when the canned webinar email is sent out. We’ll provide you with some links and information on how to contact us again.
We’ll go on to the next slide right now.
What’s my gross margin, and how’s my bottom line? Gross margin has a direct impact on your earnings and determines whether or not your sales will increase in price.
Essentially, this is a really important item to consider, particularly for companies that depend on needing to order, produce, or have a lot of inventory, or firms that are service businesses but rely on things like petrol.
You’ll see, for example, that UPS famously began charging a fuel fee when the economy collapsed, and you’ll all know what I’m talking about. Gas was really very costly, and they thought it would be a simple way to explain why they were charging more to consumers. It was all about gross margins in the end. Because gas was more costly, UPS needed to collect more money from consumers in order to increase its gross margin. A gas fee was imposed.
Many other service companies with large fleets of vehicles on the road did the same thing. Gross margin is a variable that may be highly steady for certain companies and very volatile for others.
In the construction business, I recently heard from a group of individuals here in Oregon; I serve on the school bond review committee, and we were searching for a building cost of new schools that are being constructed, and the construction cost has increased by almost 30%. That is completely attributable to price increases in materials required to construct structures, such as drywall, which has increased by 35 percent. If you’re constructing a building, this will affect the final cost, which is a gross margin expense.
That yard, those materials, they are the ones that will be used to construct the structure. If you don’t take it into account as a contractor, you won’t be able to price your job appropriately, and you’ll lose money.
You’ll want to monitor gross margin carefully if you’re in one of those sectors where prices for the items you need to buy to keep your company running vary, since you may have to do things like a gasoline fee or some other surcharge. Then you’ll have to explain to your consumers why you increased your rates, just like UPS did with the fuel fee, which we all received since we were all spending extra money at the pump. It was a straightforward explanation.
And, Tom, I’ll leave a little space here for you to join in as well, because I believe you’ve gathered some very valuable material for all of our listeners.
Misson, Tom: On gross margin, I believe I would just leave it at that. The UPS example, I believe, illustrates this point extremely effectively. It’s a crucial aspect of operating a company. It’s something that’s often neglected, especially in the context of a small company.
Small companies’ expenses have a tendency to sneak up on them at times, and if they don’t keep a careful eye on their gross margin, it may soon become a problem. I’d say it’s a critical aspect of operating a company that must be carefully monitored and monitored often.
Sabrina Parsons (Sabrina Parsons): Fantastic, fantastic, fantastic. So, when it comes to expenditures, we’ve all heard to budget carefully, right? We’ll have to do it ourselves. It’s something we have to do in our company. Isn’t it always a pain? Nobody loves budgeting; no one wants to do it; we all want to be able to spend the money we want without having to worry about it, but we can’t.
You must consider what it costs to run a company, and whether these costs are ongoing or one-time. Will they alter their behavior? Then there’s the seasonality to consider, which is something that many people overlook.
I recommend connecting costs to sales everywhere you can. Make your cost a % of your revenue, since this makes it more flexible. So, if you’re going to have a marketing line item, make sure it’s tied to sales and, if possible, sales categories. So, how much do you spend on dog boarding vs. doggy day care marketing? Based on your gross margin and profitability objectives, what percentage can you afford to spend?
You want to avoid having set costs for expenditures as much as possible and instead have costs that fluctuate with your sales. If you’re a summer-only company, start promoting in the spring to be ready for the summer. Take it all the way through the summer, but then dial it down for the rest of the year. Then, as your sales fluctuate, move up and down. At the end of the day, the other thing you have to do is keep a close eye on your expenditures and make judgments about whether or not they are worthwhile investments.
Am I spending money on items that are important to my company and its growth? If you can’t immediately link a radio ad to improved business, don’t invest the money. If you’re not convinced, stop advertising on the radio for a month and watch what happens. If you do this, be careful to compare your sales figures to the same month the prior year. Don’t get caught up in making choices that are influenced by other circumstances. If your sales drop in January after you stop advertising on the radio, be sure it isn’t simply because everyone buys your products for the holidays in December. Always compare what you accomplished in the same month the prior year, but know what works and what doesn’t, and don’t spend money until you can show it’s helping you increase your sales.
Misson, Tom: The only thing I’d add to what you mentioned is that it’s critical not just to devote time to budget creation, but also to actively monitor the budget.
Don’t waste time building it just to abandon it in the coming weeks, months, and years. It’s essential to revisit your budget on a regular basis, and it’s OK if you need to update and modify it. Don’t act as if the initial budget didn’t exist, as some small companies are prone to doing.
Sabrina Parsons (Sabrina Parsons): Absolutely, Tom, it is excellent advice. That’s fantastic, and I’m happy you stated it. We suggest that individuals alter their budgets no more than once per quarter, since if they change it every month, it’s as if they don’t have a budget at all.
Tom is completely correct. Don’t simply make a budget and file it away in a drawer, never to be seen again. Look at it, control it, and grasp what’s good and what’s wrong about it. If you’re completely off, check it out every quarter. Understand why, since there’s definitely some erroneous assumption there, as well as some gut instinct, which is why you were wrong. The more you practice this technique, the better you’ll get at it, and the more you’ll like it. I know it seems weird, but I believe I’d get an ulcer if I didn’t use all of these strategies as a company owner and manager.
I’m really devoted to this method; I like it, and it’s made looking at numbers a lot more enjoyable for me. It means I go to bed every night knowing how much money I have in the bank, how much I spend, how much I sell, and why I haven’t met my targets. I simply know that I don’t have to lie in bed and ponder and worry and develop an ulcer because of it. Tom is entirely correct. You must manage your finances and adhere to them.
Some of it is covered in the final two slides. Managing and what are the things you’re going to double-check so you don’t panic out. For example, you’ll keep track of sales and expenditures on a regular basis and in tandem. Your strategy is clear; you’ve established a goal for yourself. Expect your expenditures to be 80 percent more than expected if your revenues are 80 percent higher than expected. Expenses are usually linked to sales. Many times, someone will panic out because they just look at the cost line and think to themselves, “My goodness, what’s going on?” I only have this much money in my budget. “How come I’m spending so much more?” you may wonder. Then take a peek at your revenue. Are you selling a lot more now? Because when you sell more, you usually spend more.
You can’t look at one without looking at the other. I’ll tell you a short tale about a number of businesses that made errors when the crisis first struck us in the autumn of 2008. Many of the businesses that came to us for assistance stated things like, “Thank God I reduced all my marketing expenditures because you should see what my sales look like now.” It was difficult not to gasp when they stated it since I was thinking to myself, “My God, maybe your sales are so low because you reduced all your marketing expenditures!” “No, my sales were always going to be poor, so I simply cut and cut and cut,” they reasoned.
Recognize the link between sales and expenditures, and double-check them often and jointly. If you’ve done a good job of tying your sales and expenditures objectives to your sales goals, your expenses goals will be linked to your sales goals. This will become clearer to you as time goes on. Do you have any ideas, Tom?
Misson, Tom: No, I believe you’ve covered all the bases.
Sabrina Parsons: That’s fantastic. Because we’re towards the end of the hour, I’ll go through the last few of ones quickly, and then we’ll address a few questions for you.
How is my money doing, cash? What are some of the things I see small companies do all the time, and I’m sure Tom at MasterCard sees them as well, since MasterCard has such excellent small company credit solutions for all of you? People often mix up cash with profits, focusing only on the profit and neglecting to consider the real cash and accounts receivable.
Accounts receivable refers to money due to you but not yet received. You owe it to yourself. You must know how much money you are due and how soon you can collect it. This will have an impact on your bottom line. You may be very successful and yet go out of business because the bank doesn’t care how profitable you are if you don’t have any cash on hand.
Because you owe $100,000 in accounts receivable, you may be successful, but it’s book income, meaning it comes out of your pocket if you don’t have cold hard cash on hand.
You’ve undoubtedly heard that you need to understand your finances. Cash reigns supreme. Understand the connections between cash on hand, earnings, and accounts receivable, as well as your billing and payment cycles. If you understand them, how do you bill, when do you bill, and should you make any changes? When do you have to make a payment? As you get a better understanding of this, you’ll be able to see what kind of credit solutions you may be able to utilize strategically to assist your cash flow.
This is exactly what MasterCard does, and this is exactly what Tom does. Tom If you have a few thoughts to add, I’d love for you to do so.
Misson, Tom: A few of things, to be sure. On the receivables side, there are still many small companies who do not take cards, and for a long time, many of the reasons why small businesses did not accept cards were because the merchant services provider would not offer them the chance to accept cards due to an underwriting problem. Perhaps there was a long-term agreement, a buy-in agreement, or something similar. Again, technology has changed this quite a bit, with companies like Square and other [inaudible 49:30] providers making it very simple to take cards.
While some of the costs, known as discount rates, may seem excessive, consider what you receive in return: prompt payments, excellent money, and usually larger transaction quantities. If you have a client who you can’t get to pay you or who won’t pay you in 60 days, but a card can provide you excellent money in 24 to 48 hours, that’s a fairly reasonable tradeoff to consider. A large number of small companies do not accept credit cards nowadays.
On the other hand, there are a lot of advantages to really managing costs, such as utilizing cards for items that you would usually write checks for, since there are a lot of controls and a lot of ways that controls can be established to better manage expenses by workers.
If you have a credit card today and are unaware of some of the controls that the issuing bank may provide via credit card, you should investigate because I believe you will be surprised at some of the technology that has made its way into even the most basic card products.
Sabrina Parsons (Sabrina Parsons): Sorry, I got a little too enthusiastic with the mouse here. Because this is clearly their line of business, I figured Tom would offer some excellent advise. That is my recommendation: contact individuals like MasterCard, your bank manager, and others in the business before you run out of money. Don’t put off taking action until it’s too late. Understand your cash flow and establish your objectives for three, six, or nine months from now, when it seems that you may be experiencing some cash flow problems but not profitable. That is when you go and obtain the credit that you need. Don’t wait until you’re in difficulty to seek help.
I’ll give you a short rundown of some additional objectives you might establish apart from financial ones; I won’t spend much time on this since financial goals are the most essential. If you do them, you’ll get hooked to them and begin to think of new objectives to establish. It’s what always occurs; it happened to me, and it’s occurred to the small companies with whom we deal. When you start establishing financial objectives, you’ll see how beneficial it is to your company. You’re sticking to your objectives, and you’re starting to want to achieve as many as possible.
We’re a bit nuts about goals and statistics at Palo Alto Software, and we even go so far as to offer cheap gym memberships to our workers at the gym across the street. Because we want to encourage people to stay healthy, the more times you go to the gym as an employee, the more Palo Alto software pays for your gym membership. We’ve even established objectives where if an employee goes to the gym twice a week, we’ll pay for half of their gym subscription. It decreases from, I believe, $70 to $35 per month. We’re a little crazy when it comes to objectives, but it’s worked out well for us.
Here are some more metrics to consider. You’ll notice your average cart order, also known as your eCommerce conversion rate, or ECR, on any commerce site. You can look up all of this on Google and get a wealth of knowledge. Don’t simply look at the number of visits to your website; look at the number of unique visitors each month. It’s a misunderstanding. I could go to your website eight times and yet be the same one person you could sell to. Look for unique visitors instead than simply visits.
Table turns and average revenue per table are important in a restaurant. The busiest day of the year, the busiest service. Number of customers and average monthly income per client in a service company. This happens once or twice a month per account, and once or twice a month each user. In our company, we call it ARPU (Average Revenue Per User). Accounts Receivable days are days when money is owed to you. Invoices are being paid out by service companies. Service companies often have tax liabilities that they must consider since they receive money and then must pay taxes on it. Average daily customers, average cash register ring in retail stores. Inventory of the most popular products.
All of them are stacked on top of each other. I put them up here because of Palo Alto Software’s company, and since I operate this firm, I ask small companies these kind of questions everywhere I go. I go into a coffee shop and discover the person serving me is the owner, so I ask him these questions. When I go to the bike store to look at purchasing a new bike for my kid and ask the questions, what surprises me, and it shouldn’t, but it does every time, is that the owner can’t always answer all of them.
When I inquire, “Hey, how many consumers do you have each day?” or “How many customers do you need per month?” What is the average that customers must buy in order for you to be successful, and it astounds me when a company owner does not know. They don’t, though. So here are a few more stats. They aren’t meant to be all-inclusive KPIs for all companies. It’s simply to get your creative juices flowing and to get a sense of all the various metrics you may monitor and set objectives for. Do you have any additional metrics or anything you believe others should be looking at that I’ve missed?
Misson, Tom: No, I believe you’ve covered all of the main points.
Sabrina Parsons (Sabrina Parsons): Great. Here’s a summary; we’re nearing the finish and only have approximately four minutes left. While you’re looking at this slide, I’m going to have Peter come in and see what we can do. We won’t be able to answer all of your questions right now, but we’ll attempt to address some of them when we send out that email with the recorded webinar. It will take a few days for us to create the webinar and prepare the email with the material, but you will all get a link to the canned webinar. Do we have any questions for you, Peter?
Thorsson, Peter: Yes, I believe we can combine a few of them into one. It seems that one company is seeking to increase inventory for which they need financing, while another is relocating to a new location, and they’re both asking the same question about how to—which method is best to provide part of that funding. How do they approach that concept and, I suppose, incorporate it into some of the metrics you mentioned earlier? Should they rely on personal investments, credit, or loans, for example?
Let’s try to answer all of the questions, or at least all three of them. What if we said there were some fundamental principles for getting started while searching for financing or determining the cost of a capital expense?
Sabrina Parsons (Sabrina Parsons): Tom will be the first to leap in. Again, I appreciate the presence of someone from MasterCard, who clearly specialized in assisting small companies in obtaining financing. Tom, what are your views on the matter?
Misson, Tom: I’d start with a general rule of thumb, which is that one should only borrow to grow sales or reduce expenses. Of course, there are exceptions; this is simply a general rule of thumb.
There seems to be a need for inventory in this instance. What are the options for funding inventory? Inventory is often a short-term financing requirement, and one method to accomplish that is to use a revolving rate, which I’m familiar with since I work in the card industry.
Cash receivable lending is available. Factoring, seasonal lines of credit, contract lines of credit, and vendor credit lines are all options. There are a plethora of alternatives available.
The fact is that short-term finance is often less costly than long-term borrowing. I believe most people are aware of this. I think the point is that there are a lot of choices out there now, and there are even more possibilities being presented all the time.
If conventional banking funding is difficult to get because the company has not been in operation long enough to satisfy some of the standard underwriting requirements or for any other reason, there are several nonbank financing alternatives to explore. Sabrina, those are my first thoughts.
Sabrina Parsons (Sabrina Parsons): Great. I believe you’ve covered the most of it, and I believe you’re correct. We’re almost at the top of the hour, Peter. Do you suppose we’ll simply send out an email with the answers to the remainder of the questions?
Thorsson, Peter: I believe we will do as Sabrina said and send the email along with the post, which will most likely be placed on Bplans.com if all goes as planned. If there are any open questions, we may answer them in that post. Let’s finish it up right now at the conclusion of the hour.
Sabrina Parsons (Sabrina Parsons): Thank you very much, Tom. All of your donations are much appreciated. I believe we were very fortunate to have you and your knowledge of small company, financing, and business operations and management. Thank you to everyone who came out and listened to what we had to say.
Misson, Tom: Sabrina, thank you very much. I enjoyed the chance to speak with you and the rest of the group today. I wish everyone a pleasant afternoon.
Sabrina Parsons: Thank you so much.
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