179: Setting and Revising Your Financial Goals

Systems & Strategies
Written By Michele Williams

179: Setting and Revising Your Financial Goals

with Michele Williams

Each year we go through a process of setting our financial goals for the following year, or at least we should. And I don’t use the “should” word without consideration. Many of us hate to be told what to do, so my hope is that in this podcast you understand the why behind it and you decide for yourself that you ‘should’ create financial goals.

Topics Mentioned: 

  • Metrics

  • Financial goals

  • Top-down

  • Bottom-up

Listen to the Episode

Back in episode 11, I worked with Tracie Taylor to go through a backwards financials exercise. If you have not walked through that episode, it is worth listening to or reviewing. 

I can remember early on in my creative career not setting financial goals for my company but doing more of a take what comes approach. This meant that I had no real sales goal for each interaction with my clients, no idea of how much money I needed to bring into my company to pay the bills or pay me – I was just enjoying the creative aspect and hoping and praying it all worked out and I stayed flush with cash. 

Until I did not. 

And then, I decided to get my financial act together. You can read some of my story in the book “What I Learned on a Well-Designed Business, the Power Talk Friday Experts, Vol.1.”  You see, if I never set financial goals, then I never really knew if I could spend money on a given service or product. I was always guessing. I also did not know how to pay myself or those supporting me and the question that rattled inside my head was always, “can I afford this?” 

Taking the time to really understand my financials was a life and business saver for me – and it can be for you. Now, I set yearly financial goals and have even set some years out in my strategic plan. This forward thinking establishes a base line for my spending and decision making and allows me make company growth plans. 

Let’s talk about two high-level ways to set financial goals. I call them, top down and bottom up. And before you ask, I use both. 

Top down allows you to begin with the total sales or revenue you want to bring in. When we use this method, often we are comparing it to the prior year and choosing either a number or a percentage increase. 10% is considered an increase of almost normal maintenance growth. Higher than that is more accelerated growth. Maybe you have a number that you just know you want to reach, so use that number and then work your plan around it.  

If we are using a top-down method based on historical data, it is also important to understand your pricing strategy because that will impact your COGs percentage and gross profit percentage of total revenues. You can decide on whether to keep those the same for the new year or if you want to tweak them a few percentage points in the opposite direction (up or down).  

Continuing with the top-down method, consider your expenses. What do you want to add or remove for this new year? What can you renegotiate? What is not on the prior year P and L that will be – and what is on there that won’t be going forward?  

After doing this work, you should have a net profit. With this net profit, you will then parse it out into the categories it might represent such as taxes, company savings, bonuses, retirement and maybe owner’s draw. 

What I love to do is choose a method of planning then stress test it by going the opposite direction. 

So now, let’s look at bottom up. Bottom up starts with defining out the net profit and how it will be used. Many start by creating their salary first, then taxes and company profit, bonuses, etc. and adding all that up. This becomes the net profit number. You can then build out your expenses as explained earlier. When you add up your expenses and your net profit, you will now have your gross profit. 

If you know your gross profit as a percentage of total revenue, simply divide the gross profit by that percentage to get the total sales number. 

For example, if your gross profit is 250,000 and your gross profit percentage you are desiring is 48%, you will divide 250,000 by .48 and the total revenue will be 520,833. This would make your COGS $270,833.   

Using numbers and percentages, you can go back and forth in your financial model until it matches your strategic plan and the more defined goals for the year. Since we are always aligning our goals with the overall strategic plan, this financial exercise takes into account your rent or build out if you are moving into a new space. It should include any human resources needs like hiring, raises, or bonuses or even additional benefits you want to add. Consider technology needs and the costs for that or new computers that might be necessary. All of this to say, we are not creating our financial goals in a vacuum – they are created with defined company goals for all aspects of the business. 

Creating this high-level financial set of goals will allow you to do other financial tasks to truly take control of your numbers. We will look at these in future podcast episodes. Some of the topics will be creating a workable budget, a stretch budget, key performance indicators, visual representations of the data, and others.  

I cannot share enough how creating even these five numbers as goals created relief for me. And I have seen this play out over and over and over with those I serve. Basing these numbers on data, current or historical, and aligning to goals makes the numbers real. They are not made up or pulled from the sky or borrowed from another person. You make the call on what you want to accomplish, and you can create the services and offerings that help you and your team meet those goals. Decision making will be easier once these financial goals are established. 

If you want assistance to do this, check out the Understanding Your Financials® course on my website. I walk you through all of this a step at a time. Isn’t 2022 the year to really understand your numbers and take control of income and spending? I think it is. 

Make a choice to gain control of your financial goals because profit doesn’t happen by accident. 

 

 

Key Thoughts:

  • Taking the time to really understand my financials was a life and business saver for me – and it can be for you. Michele (2:27)

     

  • Top-down financials allows you to begin with the total sales or revenue you want to bring in. When we use this method, often we are comparing it to the prior year and choosing either a number or a percentage increase. Michele (3:03)

  • Bottom up starts with defining out the net profit and how it will be used. Many start by creating their salary first, then taxes and company profit, bonuses, etc. and adding all that up. Michele (4:56)

  • Creating this high-level financial set of goals will allow you to do other financial tasks to truly take control of your numbers. Michele (7:45)

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References and Resources:

Michele Williams
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