When you look back at the last year in your business, how much time was spent addressing your biggest problems versus working towards achieving your annual goals? Are you making progress on your five-year plan?
“Five-year plan? Are you kidding? I can’t even manage an uninterrupted 5-minute lunch break.” Hey, we get it. It’s tough out there for business owners.
But hear us out. If you want to proactively grow profits, you need a process for doing so.
Proactive means creating or controlling a situation by causing something to happen rather than responding after something happens. If most of your days are spent putting out fires, you’ll end up with a lot of smoke and not much else to show for your time. We want more for you.
We want you to have a vision of what it takes to achieve your business aspirations. You won’t get there by looking at last year’s goals and upping the ante. You need to start with a long-term vision for your business.
Define Your “Why?” and Your Vision of Value
We’ve talked about starting with the end in mind, with a clear vision of the value you wish to create. Identify the returns you wish to receive along the way and at the end of the road and build a plan to earn them. We even included a handy formula to calculate the sales needed to create that value. How and when you intend to exit the business will determine what you need to accomplish before that day comes. It defines your destination.
What is your vision for your company five years from now? Be sure to consider your “WHY?” Are you in business to build wealth? To build a legacy business to pass to family? To be a reliable employer in your community? Are there altruistic reasons for growing your business? Perhaps there is an underserved population you want to help. Maybe you want to change the world. Use your “Why?” to determine what you want to achieve in 5 years. Write it down.
Look to the Future: Disconnect from Today
Five years may seem like a long time, but it goes by fast and it’s far enough out there to disconnect yourself from your present situation. That is what visioning does. Give yourself ample time and an off-site location for this type of thinking. Get specific about how the future “you” differs from today. With this image in place, establish the annual milestones for your expected progress. These milestones become your company-wide big picture goals.
Establish Your Company-Wide Big Picture Goals (BPGs)
Your BPGs are the ultimate results you hope to achieve each year as you march towards the long-term vision. Examples might include sales, profits, market share, the number of customers or stakeholders served – depending on your “Why?”. These results are lagging indicators. They can be easy to measure, but hard to influence.
Select KPIs that Align with Your BPGs
To support the company goals, you must define and measure the activities that will lead to the results. Good KPIs are leading indicators that measure the activities that drive success. They relate to the tactical plans or objectives that each employee or team will undertake to contribute to the company goal.
Establish Cascading Goals for Teams that Align with the Plan
Individuals or teams select leading indicators as KPIs to measure HOW they will make progress toward the company goal (the lagging indicator). For example, instead of focusing on the company sales goal, the marketing team has KPI targets for leads and lead quality, and the sales team has targets for response time, conversions, new customers, numbers of transactions and average transaction value. Each team defines expectations for the leading indicators that, if achieved, could be reasonably expected to achieve the company goal. This is what we call cascading goals.
What must you get right to drive your ultimate goals? What do you seek to change or improve? Marketing teams need goals to create inquiry – that is, to drive awareness and quality leads. Sales teams needs goals to convert inquiries to quotes or conversations, and to convert those to sales. They may also have measurable goals for upselling or renewing sales from existing customers. The operations team should have goals for customer retention, customer satisfaction and production efficiency – which will lead to the essential BPG, Gross Profit Margin. If the company is growing, you’ll need goals for hiring and developing talent. Align these cascading goals with your company priorities and budget.
Align the Budget with the Activities (or vice-versa?)
In business we measure our results in dollars (sales and profits), and it takes dollars to buy the resources needed to support the activities (expenses and capital expenditures). Your annual budget documents the plan in dollar terms and shows the financial pathway to your vision.
Aligning BPGs and team KPI goals with the budget is an essential step to goal setting for proactive profitable growth. For example, the targets for customers, purchase frequency and average transaction value must be reasonably expected to yield the budgeted sales. The expense budgets must provide for the resources needed to support the activities, like marketing spends, equipment purchases and staffing. Failure to align the budgets with the plans will cause the company to miss its BPG, and therefore not achieve the 5-year plan.
“A budget is not just a collection of numbers, but an expression of our values and aspirations.”
Jack Lew, U.S Treasury Secretary, 2013-2017
Creating a Financial Roadmap for the Future
The author of the budget has an important job: to create a financial roadmap that might work, based on what you WANT to achieve. Start with the “big picture” end in mind, like how many locations earning what level of sales and profits each. Then, using breakeven analysis, create a 5-line P&L that bridges the gaps from where you are today to your 5-year target. This roadmap can guide you on your journey. Detail revenues and expenses by month for two years. Simplify it to just the yearly amounts for years 3, 4 and 5.
Planning is a Process, Not a Project
Refine the plan each year as you learn more. Your long-term goals may change, and your short-term opportunities may change. Planning is a process, not a project. You’re doing it all the time. Goals keep your team focused on the activities that will make the plan come true.
It sounds like a drill that you’ll never get right because unexpected opportunities and challenges always arise. But with KPIs that link to goals, and goals that link to long-term vision, it is easier to stay focused today on the activities that will lead to your vision for tomorrow.
Next month, explore how to keep you and your team on track with the goals.
More Resources
Listen in as Profit Soup founder Barbara Nuss talks more about Goal Setting for Profitable Growth on our Small Bites of Business Insights Podcast produced in partnership with the Yum! Center for Global Franchise Excellence.
Watch as Profit Soup’s Rod Bristol shares a step-by-step process to maximize the value of your company in Dream Big, Have a Plan.
Need one-on-one help? The Small Business Development Centers (SBDCs) of America offer free business consulting throughout the U.S. Visit here to find an SBDC near you.
Are you a franchisor looking to help your franchisees make more profit? Check out our newest blog: What Can Franchisors Do to Bolster Franchisees’ Profitable Growth?