“If you aim at nothing, you will hit it every time”
Most of us have been told to set goals since we were teenagers, or even younger.
“To get ahead you need to know where you’re going,” we were mentored. But when we look across the landscape of small business in America, we see far less goal-setting than we should.
That’s unfortunate, because setting the right goals can have everything to do with achieving a lot of success. In fact, without goals – without defining what a good performance might be for your company – it’s hard to ascertain how successful you have or haven’t been.
Good goals for any business are Specific, Measurable, Actionable, Realistic, and Time-based (S.M.A.R.T.). We think there are five SMART goals for CI’s that every manager can use to take aim, take action, and measure success.
The five goals are:
Sales growth vs prior year. The market is growing; to keep up, your company needs to grow. Specifically, you should target a percentage increase over the prior year. 10% is a good number. 15% annual growth will double company size in five years. The resulting annual sales target should be divided by 12 to provide monthly milestones for your progress.
Gross Margin. This is the most important goal for any CI to manage. If your goal is 55%, it means that for every $100 in revenues, $45 is used to cover the cost of goods and $55 is left to pay all other expenses. We think the goal should be 58% or higher. Note that no other costs are included in the GM calculation. These costs are covered by the next two goals…
Compensation as a % of Sales. All your people costs, including benefits, payroll taxes, and subcontractors, make up your company’s total compensation expense. This is the single largest expense of every CI, and the #2 most important goal for a CI to manage. For a profitable outcome, these need to come in at 35% of sales, or less.
Major Operating Costs (MOC). These are the rest of your ordinary operating expenses, including rent & utilities, office expenses, vehicle fuel and maintenance, and marketing and selling expenses. The goal should be to manage these to 15% or less of company sales.
Net Operating Profit (NOP). This is what’s left over when you subtract Compensation and MOC from GM. In our example, 55% minus 35% minus 15% = 5% net. That’s an OK number but, for well-managed integration companies, it’s only 1/3 of the 15% NOP that we see as the threshold of an excellent operating result.
Of course, having the goals is only a first step. You must measure monthly to see how things are tracking to goal. We’d be honored to show you the easiest way to do that.
Keep it Vital.
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