SOP Friday: Financial Goals – The Basics
Karl Palachuk / Karl Palachuk
When most people think of financial goals they think of revenue projections. I made $335,000 this year and plan to make $400,000 next year. But there are lots of other “basic” finances you need to set goals for. Here are a few thoughts.
Okay. You need to have revenue projections. They need to be realistic. And you need to look at them often enough to KNOW them so you can reach them. After all, if you don’t your goal for the month or the year, how could you possibly reach it except by accident?
Now we’re talking money! Revenue is good, but profit is better. If you make $500,000 in revenue and only $100,000 in profit, that’s worse that earning $350,000 and making $100,000 profit. The reason is simple: It takes a lot more work to earn that $500,000.
You should have profit goals for each month and for the year.
Your profit margin is literally the connection between Revenue and Profit. You should have specific goals for each broad category of what you sell: Products, labor, services, etc.
Everyone has different recommendations for these goals. You need to set these goals yourself, but consider the following as a starting point. In my opinion, hardware and software should have a profit margin of 20%. Labor should be more like 40%. With managed services, you might push labor to 50%.
Services can be all over the map. For cloud services, we start with a 100% markup, which gives us a minimum of 50% profit margin. If you are providing a backup service, you can combine the service with your labor and maintenance for one price. If you do that, be sure to track the cost of service and related labor under “cost of goods sold” so that you calculate the profit margin.
EBITDA and EBITDA Percentage
EBITDA is “Earnings before interest, taxes, dividends, and amortization.” For most small businesses, this is almost identical to net operating profit. Work with your accountant to verify the items you need to back out of your calculations (such as tax payments made) to calculate EBITDA from profit.
But here’s the bottom line, so to speak. Your EBITDA Percentage should be a minimum of 8-10%. That is absolute minimum. It could easily get to 15% or even 20% or more. If you can’t sustain eight percent, take your money out of your business and put it into the stock market. That will give you an average return around 8%.
Monthly and Annually
All of those numbers should be tracked monthly, in your PSA, QuickBooks, or both. I like to put all of that into a single Excel workbook so that I can track the “Year to Date” information. Sometimes you’ll invoice a client in one month and then end up ordering the equipment (incurring the expense) in the next month. As a result, the first month will look more profitable than it should and the next month will look less profitable than it should. But the year to date stats will be correct after the 2nd month.
Anyway, you should have monthly targets for revenue and profit, primarily. Everything else flows from that. I recommend looking at your finance AT LEAST once a month. Ideally, you should do it every week on the same day. That gives you a good sense of how money flows in and out of your company.
As the year moves along, you should have two sets of numbers: The real numbers for months past and the projected numbers for the months ahead. And of course you’ll have a final tally for the end of the year. As the year progresses, each month will move from “projected” to “actual” and your projection for the whole year will become clearer and clearer.
I know this sounds like a lot for the basics, but once you begin looking at these numbers all the time, it will be very easy to understand at a glance and won’t take more time.
One of my favorite maxims of success is that you get better at whatever you put your attention on. If you put your attention on your finances, you will make more money. It just is true. And once you have goals for each month and the year as a whole, you can reach them as well.
In a couple of weeks we’ll talk about realistic revenue projections. For now, work on making sure you have a grasp of the basics.
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About this Series
SOP Friday – or Standard Operating System Friday – is a series dedicated to helping small computer consulting firms develop the right processes and procedures to create a successful and profitable consulting business.
Find out more about the series, and view the complete “table of contents” for SOP Friday at SmallBizThoughts.com.
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Next week’s topic: Signing Service Agreements
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All material Copyright (c) 2006-2013 Karl W. Palachuk unless otherwise noted.