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An American philosopher once said that if one went forward confidently, success unexpected would follow. Many following this dictum would consider that blind faith was sufficient to ensure success but in business that faith needs to be based on a sound foundation. A survey of well run businesses would reveal several common themes - a good understanding of their market place, how to maximise the opportunities it presents, a good information and reporting system and sound finances. Over-arching all of these will be a series of attainable milestones or objectives for which there will be detailed action plans. The principles set out below are equally relevant to businesses both large and small. In business, success is usually determined by the profits achieved which in turn should, over time, be reflected in the cash balances held by the enterprise.
Why use Milestones or Financial Objectives:-
Milestones are a form of measurement - in the same way that an athlete would check his time. A good business plan should always have an Action Plan setting out the means of achievement - ie identifying targets and the issues which need to be resolved for their attainment. Good examples would include market dominance, new product sales levels, production capacity or staff utilisation etc. Additional benefits of using milestones include:-
- To reward the star performers whose contracts of employment can be tailored to the particular needs of the business.
- Setting targets and attaining them will often throw up other unforeseen profit improvement ideas.
If the progress of a business is not checked on a regular basis, the businessman is unlikely to have a clear idea of what additional resources he needs. Panic can then set in when a major problem arises and without a contingency plan wrong decisions are often made.
Setting Financial Targets
It will be apparent that financial targets come in many guises - either at the corporate level or at a departmental level. A few examples and the underlying considerations when setting targets might include:-
- Gross profit margins: consider whether and how the expected margin can be improved by adjustment to staffing levels, purchasing policy or capital investment
- Sales targets: consider the organisation of the sales force and the means of distribution in your industry. Should you be selling direct or using agents, distributors and wholesalers or indeed whether technology should be sub licensed for a fee.
- Productivity or utilisation of staff: how do you measure this; are your systems upto it and would an incentive scheme - perhaps a Profit Related Pay scheme - help you improve in this area.
- Utilisation of space / rent property: perhaps the most difficult area in the present property market. You could monitor sales per square foot - especially for retail businesses, but important to all. Consider whether you can move and never sign up for a long term lease without break clauses.
- Asset management: this covers the rate at which you collect the debts, pay the creditors and turn over the stocks held. Perhaps you want to get the accounts receivable ratio down by 10 days; consider stage payments, proforma accounts or even discounts. The sales ledger team could be monitored on their success. Stock holding is often neglected as an area of profit improvement.
Each of the above items could be set as a separate exercise but are best grouped together as a profit improvement plan. To be really effective, it is important for the management's aims to be communicated and sold to the staff so that the business can operate as a team rather than as a gaggle of loosely associated work fellows. Where-ever possible, attainment of particular milestones should be entrusted to key members of staff so that they can "own" and be responsible for the strategy. Targets should be set for both the short and medium term (2 - 5 years). Without any knowledge of where the business is heading, the businessman is unlikely to make the best decisions. Keeping to Financial targets:
The key to keeping to financial targets is regular measurement. Whilst some targets are given to weekly (or even daily) monitoring - eg staff utilisation or productivity - most are best reviewed on a monthly basis against the budget. The variances must be analysed and if necessary the Action Plan adjusted.However, Plans should not be followed slavishly as all businesses must be able to adapt to the ever changing business environment. The best way of reviewing is to set up a regular monthly Board or management meeting to consider progress and plan the next phase. A useful ingredient is the non executive director or business advisor who can provide independent comment based on his wide experience in many companies. This is a growing role for my firm. Conclusions:
Financial objectives are very important to all businesses and an essential tool to profit enhancement.To stay in business, businesses need to grow and adapt to the changing environment. The measurement of progress against agreed objectives are the key to ensuring that remedial actions are taken soon enough and opportunities grasped. If used properly, they are a way of involving the whole workforce and welding them into an effective team. Lastly, the golden rules about financial objectives should be:-
- Achievable - (but not too easy)
- Realistic
- Given to an appropriate personnel
Good plans also provide for contingencies and adequate resource to take on new business or ideas. But always remember to concentrate on the profit line - not the sales line.
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