Financial Goals and Indicators for the Micro-Entrepreneur
“Financial success, like most successes in life, is not about perfection, but about direction.”
Throughout my years of work, I’ve had the pleasure of speaking with many entrepreneurs. These conversations have taught me a lot and have inspired both my own entrepreneurial journey and the content I share with you in this resource section. Four out of ten entrepreneurs I’ve interviewed have indicated that the main managerial skill they lacked at the beginning—and had to learn one way or another—was financial management of the business. That’s why I want to dedicate today’s article to discussing the financial goals and indicators of a business from the perspective of a micro-entrepreneur.
I don’t have a deep financial background. I’m a social psychologist with an MBA, where, of course, I was exposed to economics and finance concepts. However, I identify with all the entrepreneurs who have had to face the need to learn basic concepts in order to manage their business finances properly. So today I bring you a resource on “financial” topics seen through the eyes of a non-financial user—like you. I’ll share the main concepts that have been useful to me for ensuring the financial health of my businesses in a way that I hope is simple and understandable, yet accurate.
Financial Planning
Let’s clarify two concepts that, in my opinion, are essential: 1) Financial goals and 2) Financial indicators. Both should be included in the “financial planning” of your business.
Yes, I said “financial planning.” Because just as you should have an essential general plan for your venture, an annual work plan, and a marketing and sales plan, you also need to develop a financial plan if you want your business to be economically stable.
By definition, a business is meant to generate income. Entrepreneurs, in most cases, decide to start a business, among other reasons, to generate their own source of income that allows them to sustain their lifestyle and that of their employees.
Let’s say this applies to most ventures. You might tell me that social enterprises don’t necessarily seek to generate wealth. That’s true. However, even social ventures that are not looking for economic profit still handle money and require proper financial planning so that their resources are sufficient and optimized to achieve the goals of the venture.
Financial Goals
Financial goals, like any goal in any area, define where you want to go and what you want to achieve. In this case, what you want to achieve in financial terms.
Financial goals in particular define how you will act regarding money in your business and serve as a reference point for the financial and economic decisions of the company.
To define your financial goals, you should ask yourself questions like:
How much do you want to bill/sell in the period?
What profit margin do you want to achieve, before and after taxes?
What market share do you want to reach in that period?
It’s not enough to work hard to sell more. If you don’t have defined financial goals, you’ll never know where you stand or how much more you could achieve.
Making a lot of money or selling a lot are not clear goals. They’re not even the most beneficial at all times. If you want your business to last in the long run, grow, and develop, you need to have a plan beyond just selling a lot and earning a lot.
To define your financial goals properly, realistically, and attainably, you need to consider the environment in which your business operates—the current environment and the potential future one. You should try to stay up to date with information about your sector, your country, regulations, and data about your consumer. Everything that allows you to more accurately predict market trends. This will help you set financial goals that are not so conservative that you fall short of your potential, nor so ambitious that they are objectively unattainable.
As with all business goals, financial goals should be established as SMART goals (Specific, Measurable, Achievable, Realistic, and Timely). You can find more information about how to work with these goals in the resource that explains how to create the Annual Plan.
For example, instead of writing a goal like:
“Increase my sales”
You should write it as:
“Increase sales by X% compared to XXX period within XXX months.”
And it should be a reasonable and attainable growth rate based on market conditions and competition.
Instead of writing a goal like:
“Increase my profit”
You should write it as:
“Achieve X% profit before taxes by X date.”
If you don’t establish financial goals regarding what you want your business’s financial performance to look like, you’ll never know how well or poorly you’re doing compared to your expectations.
However, it’s not only about defining what you aspire to sell and earn. Your financial goals should include more details about other aspects of managing your business’s money and finances.
You should also ask yourself questions like:
What investments do you need to make during the period?
What specific production, marketing, and sales plans will help you achieve those financial goals?
How much can you finance your operations if cash flow drops?
How much credit can you extend to your clients?
How many new clients do you need to meet your sales goals?
How can you reduce your costs?
In other words, you need to know what resources you have, what additional resources you need, and how much it will cost to obtain them. These guidelines will allow you to make decisions about the use of money and, very importantly, about the economic conditions you can or cannot accept in negotiations with clients and suppliers.
This will allow you to establish other financial goals such as:
“Invest X in the acquisition of X equipment that will increase production by X% or reduce costs by X%.”
“Not accept payment terms longer than X days from clients or apply a financial cost of X% to invoices that exceed that time limit.”
In this way, you’ll not only be defining what you want to sell and earn but also the economic conditions that must be met for those results to be attainable.
Financial Indicators
Alright, you’ve defined your goals for the year. Can you sit back and relax now?
No.
As with any plan, the success of achieving your goals depends on proper monitoring of execution to ensure you're on the right track—or, if not, to take action and make adjustments to increase the likelihood of meeting your financial targets.
That’s where your business’s financial indicators come in.
Surely, at least once a year, you hand over your numbers to an accountant to prepare the necessary documents for your fiscal year-end and to comply with all your country’s tax responsibilities.
However, analyzing your numbers only once a year is not enough.
Unfortunately, if you leave everything until the end of the year, you risk being surprised—and you may not have time to make the necessary corrections if things go wrong.
Financial indicators regularly show the stability and financial health of your business and help you make decisions.
In my experience, updating some financial execution indicators monthly, reviewing them, and making decisions leads to much more efficient execution and a much higher likelihood of meeting your goals.
Many entrepreneurs rely on intuitive indicators. If there’s more money in the bank account, if we have constant work, if new clients show up—those all seem like signs that things are going well.
Don’t rely on intuitive indicators. Be sure to develop and maintain quantitative, technical, and objective indicators.
Quantitative and technical indicators don’t mean complicated math or hard-to-calculate and interpret formulas. With a simple spreadsheet where you update some figures monthly, you can stay up to date with your business’s financial information.
There are many indicators you can define and use. Below are the 8 that, in my opinion, have been the most useful throughout my business life and are easy to calculate and track. I’m not giving you complex technical names, just their simplest version:
Total Billing: The total monthly figure of all your product and service sales.
Total Costs and Expenses: The total monthly amounts you’ve spent to keep operations running and to offer products and services.
Total Profit Before Taxes: The difference (subtraction) between total billing and total costs.
Profit Margin Before Taxes: The ratio between total profit / total billing. It shows the percentage of your income that exceeds your expenses.
Accounts Receivable: The total amount clients owe you for products and services already delivered and invoiced.
Accounts Payable: The total amount of supplier invoices you’ve received and still need to pay.
Accounts Receivable / Total Billing Ratio: Indicates the percentage of delivered and invoiced products and services that you haven’t collected. It’s an indicator of customer delinquency.
Average Days to Invoice Payment: The average number of days your clients take between the date you send the invoice and the date they pay.
You can prepare a simple Excel spreadsheet with these indicators and update the information every month. In a very brief summary, you have the core of your financial indicators to analyze and make decisions so you can perform better next month.
You can download an example below. If you wish, you can use this same spreadsheet or adapt it to your needs. I’m sharing it simply as an example of how easy this can be. If you’re disciplined in entering the required data each month, accurately, you’ll be surprised by the usefulness of such a simple tool.
In summary, the tasks you should commit to if you want to have a financially healthy business:
Develop an annual financial plan in which you set your goals and the indicators you want to track.
Prepare an annual budget outlining all the annual and monthly expenses you expect to have.
Track your critical indicators monthly and make decisions when you see deviations that may indicate a problem.
Organize your payments. Make sure your supplier accounts and pending invoices are in order. Take advantage of grace periods with each supplier, but avoid falling behind to protect your credit history.
Develop an efficient collection process. Don’t allow clients to take longer to pay than your finances can handle. Set clear rules and be proactive in collections.
Use technology. Nowadays, there are many apps and software tools that allow you to manage your finances easily. Many are tailored to the tax requirements of each country. Find the one best suited to where your business operates and move your financial management to a digital platform.
Understand the tax requirements and implications in your country, so that by year-end you won’t be disappointed when part of what you thought were profits goes to taxes. Include all your tax obligations in your budgeting.
If your business starts to grow and develop, and you see that it’s time to bring in help from partners, employees, or vendors, make sure that professional help in the accounting area is one of the first you seek. That doesn’t exempt you from the need to understand these topics, but it does allow you to focus on what you do best. Stick to your strengths. However, until the time comes when you can hire a specialized professional to oversee your accounting and financial operations, make sure you build the habit of maintaining proper financial goals and indicators.