Many small business owners lament that the past few years have been difficult financially. Yes, the recession hit hard and the recovery is going slowly. However, with the proper planning, any business can thrive no matter what the economic landscape.
Unfortunately, many small business owners are so busy putting out daily fires and just trying to stay afloat that they never take the time to plan. That’s a mistake! Here are the key financial planning items to focus on for both the short- and long-term.
- Reduce your debt. If you’re like many small business owners, you may have financed your business on a credit card or through other personal loans. Now that debt is hanging over you like a dark cloud. Even worse, you’re likely putting any profits you make back into your business rather than putting more money toward paying off your debt. If your debt load is large and dragging you down paying it off can seem like a daunting task. The key is to stop trying to pay every creditor off at once. Rather, pick one creditor, preferably the one you owe the least to, and focus on paying that one off first. Pay the minimum on all your other debt, but put as much as you can each month toward this one bill. Then, when you pay that debt off, take the money you were allocating to the creditor and apply it, along with the minimum you were already paying, to your next lowest debt. Focus on paying just that one off. Then repeat the process with your next lowest creditor. Keep going until all your debts are paid. As you cross each paid creditor off your list this next year, you’ll feel your financial dark cloud start to break.
- Create a budget for your business. You likely have a budget for your personal life. You know how much you have to pay yourself to cover your mortgage or rent, your groceries, and other essentials. But chances are that you don’t have a detailed budget for your business. Now is the time to make one. Just as you do in your personal budget, start by making a list of all the business expenses you pay out every month. Be sure to include your salary in the equation. If you’re in the habit of paying yourself sporadically or a varied amount each month based on what’s left over, pick a steady, realistic income figure for yourself and calculate that in. Then add in the expenses that are possible but not customary, such as repair costs for equipment, additional staff, new software or services, etc. When you have a firm grasp on where all your business money is going each month, you can create strong financial goals for your company (see next point).
- Set financial goals. Of course you want your business to do better this year than it did last year. But do you have clear monthly and yearly goals mapped out? Most small business owners don’t. Now that you know how much you need to earn each month to cover your business expenses, take a look at what your business brought in over the past few years. Look for any trends, such as a 10% increase each year, stagnate sales year to year, or even a progressive decline. After you have a clear assessment of what your business did historically, create financial goals for the coming year. But don’t just state any goal because it sounds good or would be nice to achieve. Make sure you’re setting S.M.A.R.T. goals—that is, goals that are Specific, Measurable, Attainable, Relevant, and Time-Bound. Here’s what each word really means:
- Specific: A specific goal has a much greater chance of being accomplished than a general goal. Goals must be clear and unambiguous. When goals are specific, they state exactly what is expected. For example, stating “We will do $1 million in sales” is specific. Saying “We will do better than last year” is not.
- Measurable: Establish concrete criteria for measuring progress toward the attainment of each goal you set. If your goals are not measurable, you never know whether you’re making progress toward their successful completion. Having monthly financial goals helps you measure whether you’re on track for your yearly goal.
- Attainable: Goals must be realistic and attainable. The best goals require you to stretch a bit to achieve them, but they aren’t extreme. That is, the goals are neither out of reach nor below standard performance. Goals that are set too high or too low become meaningless and will be ignored.
- Relevant: To be relevant, a goal must represent an objective toward which you are both willing and able to work. A goal can be both high and relevant; you are the only one who can decide just how high your goal should be. Realize that a high goal is frequently easier to reach than a low one because a low goal exerts low motivational force.
- Time-Bound: A goal must have a target date. “Someday” won’t work. But if you anchor it within a timeframe, “by December 31, 2014,” then you’ve set your unconscious mind into motion to begin working on the goal. A deadline too far in the future is too easily put off. A goal that’s set too close is not only unrealistic, it’s discouraging. That’s why you need both monthly (immediate) and yearly (future-oriented) financial goals to strive for.
- Your Best Year Yet. No matter how many ups and downs your business has had over the years, you can make a giant financial leap this next year … if you follow the suggestions outlined. The more priority and urgency you place on your business’s financial outlook, the more success you’ll have this coming year and for decades to come.