How to set financial goals

business.gov.au lists what goals do for a business: they help you focus on what matters, motivate employees, give you specific targets and show whether the business is succeeding. Financial goals do this for the figures in your books, such as profit, cash and debt.

They also sit underneath other plans. business.gov.au says clear goals should guide your spending decisions when you build a budget, and that a business plan helps you set clear goals for the business and its money.

Before you set a target, know where you stand. Take these from your last full year of books, reconciled and complete:

• sales, gross profit and net profit from the profit and loss statement
• cash at bank, what customers owe and what you owe from the balance sheet
• loan and credit card balances
• what you were able to pay yourself from the business
• how long customers took to pay, from invoice dates, due dates and matched payment dates; use the unpaid invoice list separately to see what remains outstanding.

These starting figures matter as much as the targets. A goal measured differently from its starting point can look met, or missed, when nothing has changed.

Pick a small number of goals that matter most this year. Common areas for a small business are:

• profit: a higher gross profit on each sale, or a net profit target for the year
• cash: a reserve set aside for quiet months or known large bills
• debt: a card or loan balance reduced by a set date
• collections: customers paying closer to your terms
• costs: a particular expense held at or below its current level
• the owner's pay: a regular amount the business can support.

business.gov.au's warning signs of financial trouble include not being able to pay yourself from the business and relying on borrowed money to keep trading. If either applies, a goal that addresses it may come first.

business.gov.au recommends goals that are specific, measurable, achievable, relevant and time-bound. For financial goals, measurable usually means a figure you can read straight from the books, and time-bound means a date that lines up with a month end.

business.gov.au's questions for each test are worth asking out loud. Where will I get the information to measure progress? What resources do I need, and does the business have them? Can I break this into smaller steps?

A goal changes figures somewhere. A profit goal changes prices or costs in the budget. A debt goal adds repayments to the cash flow forecast. A reserve goal adds regular transfers to a separate account. Put those changes in, then check the plan still works month by month.

business.gov.au suggests breaking a large goal into milestones. Milestones at each quarter end give you points to check against the books.

The first quarter fell just short. Spotting that in October leaves the rest of the year to catch up, and the reconciled card statement gives the actual figure for each check.

business.gov.au suggests planning how you will reach each goal under a few headings:

• Actions: the individual steps, such as repricing the menu or asking suppliers for quotes.
• Timeframe: a realistic deadline for the goal and each milestone.
• Resources: the budget, staff and tools the goal needs.
• Accountability: sharing the goal with staff or people you trust, who can help keep you on track.
• Review: how you will measure success, and time set aside to check progress.

Check each goal at the month end, once the books are reconciled, and note what moved it. When a goal falls behind, decide whether to change the actions, the timing or the goal itself. business.gov.au suggests deciding what you would do if a goal falls behind.

The end of the financial year is the natural point for a full review. At that point business.gov.au suggests checking the year's results against the goals set at its start, then choosing goals and priorities for the next year.