Great strategic planning is behind every great business. Jeff Bezos could already see what Amazon would become before he had even sold his first book and had quit his trading job. But behind every good strategy something more tangible is needed: numbers.
Every successful strategic plan needs a financial plan to help execute it.
Your strategy is your planned route to achieve your goals. The financial plan is both the translation to operational reality – can you actually afford this strategy? the scorecard are you on track? Your financial numbers become signposts to the future business you want; a ladder to your goals.
In this article, we look at how to match your strategic plan with the right financial plan.
Matching your strategic goals with financial goals
Success is different for every owner and business. It is thus key that your financial goals match your strategic plan and definition of success.
Three common strategic goals are:
- Building to sell – the serial entrepreneur
- A business that supports a lifestyle – travel and the four-hour week or a side hustle
- Scaling up to a category leader – the unicorn
Each of these strategies has very different financial goals:
|Strategic Goal||Financial Goal|
|Build to Sell||Business profit or exit value|
|Lifestyle Business||Personal income|
|Unicorn||A specific revenue level or company valuation|
Using the right metrics and KPIs
Once you have matched the right financial goals to your strategic goals then the next step is to select the right metrics and KPIs to track your progress.
Build-to-sellers are targeting a certain exit valuation, which is usually based on the profit of the business. So you should track at least:
- Overall revenue
- Revenue from particular categories and products.
- Overall gross margin
- Gross margin per category
- Overhead expenses as a percentage of revenue
Know your best selling products and services. If their sales dip, act quickly. Look for similar products and services to sell or look for cross-selling opportunities with your other products.
For you to track these numbers, it is important to have your bookkeeping and financial reporting in order.This is particularly important for build-to-sellers as this will be the first place that potential buyers will look.
For Lifestylers, the number one metric to track is operational cash flow. If you’re building a lifestyle business, revenue is a vanity metric that does not directly correlate with your goal that well – after all, if you grow in revenue, but are losing money – the business does not support your lifestyle (yet).
Cash flow is the amount of available cash that your business generates in a given period. Operational cash flow is the cash generated from your normal operations. It ignores one-off cash events like the purchase of new equipment or the sale of fixed assets – events that only happen rarely and are not related to your normal sales and purchases. Read more on Cash flow for eCommerce and Service businesses.
Another good KPI for lifestylers is to look at the pattern of cash flows coming in and out over a year. Best practice is to match the timing of cash inflows and outflows as close as possible.
Are there times of the year where cash inflow is higher such as the fourth quarter? Can you work with suppliers to increase inventory levels just a little in advance of those periods? This eliminates periods of excess inventory and cash stress. Another approach is to ask suppliers for better terms during busy times. Can you spread payments out or reduce the deposits needed?
We helped one client make an extra $500k by planning out their inventory purchases and identifying the need for short-term finance. Previously, they ran out of capital which led to delays for their customers and a negative hit to their Amazon Inventory Performance Index.
Another useful KPI is the Runway – how many months worth of expenses do you have in cash in the bank?
If you are looking to scale up your business so that it dominates a category then revenue and revenue growth rate are the key metrics for you.
And not just the headline revenue figure but revenue growth for your different products. What products are growing fastest? Fast-growing revenue is a signal that you are providing customers with what they want.
If this is your goal – profitability is only a second order metric, as you will almost certainly be raising external funding to maximize the investments in your growth rate.
I’m a big believer in the hierarchy of financial needs (see the pyramid diagram below). It shows where you need to prioritize your efforts when working on your finances and bookkeeping.
Your chosen metrics and KPIs require quality numbers. Quality numbers are error-free and relevant and timely. You cannot achieve your goals if you are making decisions based on wrong or outdated information.
The first step of the pyramid is to have good record keeping. Use an accounting system that automates data collection. On top of this create good SOPs to ensure that captured data and manually-entered data are checked for quality. SOPs will also help you regulate manual data entry.
Once you have good inputs, the next step of the pyramid is to ensure that you have quality and timely financial reports. These provide an overall picture of your business. You should aim to have monthly reports within ten days of the end of the month. Any longer than this and you are making decisions based on ancient history!
Also make sure you are receiving all three financial reports: Balance Sheet, Income Statement, and Cash Flow statement. Many accountants and bookkeepers will provide the first two but not always the third. As we saw above, the Cash Flow statement is critical for owners looking to build their business to support their lifestyle.
Once you have the first two steps of the pyramid, you are set for the planning and forecasting, and strategy setting discussed earlier in the article.
Hopefully, this article helps you identify the financial metrics you need to achieve your strategic goals. If you need help in choosing, calculating or displaying metrics or need to overhaul your financial reports or record keeping then do not hesitate to enlist the help of a professional.
The team at Insight Matters can help make tracking your financial goals easier with business focused bookkeeping, easy-to-follow KPI dashboards and financial analysis and advisory.