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If you are used to setting financial goals for your business you undoubtedly have a revenue goal. In other words, you’ve set a figure for how many dollars your business is going to bring in this year.
But according to Carissa Reiniger, CEO of Silver Lining LTD, that’s not good enough. If you want to achieve a financial goal in your business, you must break your goal down into “units of sale” rather than an annual, quarterly or monthly revenue number.
Last week (April 6-8, 2011) I attended the GrowCo Conference put on by Inc Magazine. I was inspired and as always when I attend events, I learned a few things. (Many thanks to UPS, which subsidized my attendance.) In a series of posts this week, I’d like to share with you some of what I learned at GrowCo.
In this, my first in the series, I cover one of the key tenets outlined by Carissa Reiniger in her workshop, “Build a Growth Plan for Your Business.”
Using her company’s proprietary methodology, Carissa walked us through the steps to build your financial goals from the bottom up. I will focus just on the portion of her session that deal with how to set financial goals for your business in such a way that you can align your strategies and tactics to achieve them.
Figure out Your Breakeven Amount
The first step for setting financial goals is to understand your monthly breakeven amount. Carissa says, “This is the revenue dollars that you have to generate if you don’t want to lose money. ” To determine your breakeven number, you’ll need to list all your expenses. And you’ll start with your personal expenses.
Now if it seems odd to start setting business financial goals by looking at your personal expenses, it’s not. The reason you start with personal expenses is that you need them to determine your salary. You’ve heard the advice to “pay yourself first” in your business? Carissa Reiniger is a believer. One of your business expenses will be your salary as the business owner. Your salary needs to be at least enough to cover your personal expenses, or more, so that you have enough to live on. That’s why you start by adding up your personal expenses.
Next determine your hard costs. Hard costs are what you have to spend in your business regardless of your revenue. These are the things you spend each month that would not be easy to get rid of — office rent, staff salaries, and so on. “Most people don’t want to know this number because it sucks,” she says. She’s probably right — but knowing your expenses is crucial — unpleasant or not.
Set a Minimum Revenue Goal
Now that you know what your costs are, you are ready to determine your minimum revenue goal. Naturally, you want to strive to make a profit, not just break even. But at the very least your revenue number should equal your expenses so that you don’t LOSE money. Your minimum revenue goal should at least be the monthly, quarterly or annual amount needed to cover your salary as the business owner and your business expenses.
Of course, you may have a desired revenue target that is higher. But at least if you start with your expenses, you know what the minimum needs to be.
Break Down the Revenue Number
Now comes the crucial part — you have to break down your revenue goal into manageable chunks. While it might sound impressive to announce that your goal is to generate $1.5 Million in revenue this year, you need to be more specific, or you and your team will lack focus on how to achieve that revenue goal.
And that’s where “unit sales” come in. Unit sales are the real targets you should be establishing, monitoring and working to achieve in your business.
Unit sales are calculated based on your revenue streams. Determine your revenue streams by asking yourself, “What are the things you sell?” Revenue streams are simply the things you invoice for. But how many are the right number? She notes:
“If you have 27 revenue streams you have too many, and if you have one revenue stream you have too few. The right number, a good number, is 2 to 5. If you have more than 5 you’re trying to sell too many things to too many different people and you’re all over the place. If you only have one, then you’re in trouble because if that doesn’t go well it doesn’t look good for your business. “
After you have outlined your revenue streams for the year, you do an equation:
X x Y = Z
The purpose of the equation is to get to the number of units under each revenue stream that you have to sell in order to reach your overall revenue number. Essentially you work backwards from your desired revenue number.
Your financial goal should be how many units of a given product or service you need to sell and deliver if you want to achieve your desired revenue. Let’s take an example of a company that sells consulting services and also software licenses. If you are forecasting that you will make $1,000,000 from selling consulting services, and each project averages $2500, then you’d break it down into something like this:
Example: $1,000,000 divided by $2500 = 400.
The number 400 is how many of those $2500 consulting projects you need to sell in order to bring in $1,000,000. And to get to your total $1.5 Million figure, you’d need to find an additional $500,000 from software sales, your other revenue stream.
Start doing these calculations for each revenue stream. Whenever you think of your financial goals for your business, always think in terms of how many unit sales you need to make for each revenue stream — not an overall revenue figure. That’s how you get to financial goals for your business that are specific enough to be achievable.
Now, if you felt the above exercise is like opening a set of Russian nesting boxes, each time encountering yet another smaller box inside, you’re not alone. However, if you ever want to establish an action plan for what to do each day, week or month in order to achieve your revenue targets, you have to know where the money will come from that adds up to your annual revenue. This level of detail is important to understand that.
Detail = clarity and purpose.
Great article Anita. Brought back memories when I first started in marketing and we had to do it manually for all product lines. Thankfully now it is easy to do in a spreadsheet.
I find bringing it back to unit sales really paints the picture of what you have to sell. Also over time if you track it is easy to see the mix of your products or services that contribute to your revenue and allows you to make adjustments if necessary.
Anita Campbell
Hi Susan, great point about tracking the mix of products/services, and making adjustments. One of the things the speaker also talked about was adjusting your revenue streams if you find your business falling short of your revenue.
I’ve always been a big proponent of breaking down your financial goals into specific items you have to sell, and to know how many you need to sell to hit your target. So this part of Carissa’s session resonated with me.
– Anita
Marge Piatak
Thanks so much for sharing this process. I’m starting an online retail business, and also provide consulting/wellness services. This process allows me to integrate all of these income streams into one business model and realistically define what I need from each in terms of income. Breaking it down into units will really help – product or service – it’s still units!
Brad Smith
Great points Anita! It reminds me of the importance for small businesses to focus on measuring/monitoring cash flow – not just revenue. I think a lot of small business owners are great at generating revenue and managing their income or P&L statement, but struggle with the cash flow statement. Also, for service businesses, it’s important to have some sort of sales process, so you can identify what revenue is coming in next month, and what 60 or 90 days looks like.
TJ McCue
Talk about a wake-up call. Thanks for sharing what you learned at this session, Anita. Very helpful post. I like the have 2-5 revenue streams part. Not 27…
It’s true. Revenue is too abstract and you need to have more clarity in your goals to ensure that you’re not growing to death.
Shaleen Shah
What you wrote here makes perfect sense – so my question now is, after you’ve hit break even point, is it the only time that you pay yourself a salary as an entrepreneur/CEO of your business? I’d be really happy to have more than just a revenue these days.. but until then, I’m just setting my financial goals in the most realistic way I can.
Martin Lindeskog
Anita,
Great report from the conference. How many blog posts will you publish on GrowCo Conference?
I have started to calculate how many referrals I need to have on a yearly basis, after I completed the Certified Networker course by the Referral Institute in Gothenburg, Sweden. I have a scorecard there I write down my referral marketing activities as a weekly review.
Mitch Chase
Great article. I’m really trying to get a grasp on the 2-5 revenue streams. Can this apply to a retail gift shop?
Since we sell merchandise, and not services, we have a lot of various merchandise categories.
If I were to apply the “revenue stream” recommendation, would that mean to simplify the number of product categories we sell? Or do I have to find other things to sell (services)?
How would you break down revenue streams for a gift shop?
Anita Campbell
Hi Mitch,
Having been in retail before (with a gift shop/art gallery), I’ll take a stab at answering your question, from my perspective. (I can’t speak for Carissa and how she would view it.)
I would NOT apply the revenue stream concept to limit product categories — unless the products are so vastly different that they require different types of selling methods by you. In most retail gift shops, more merchandise choices will be better. Customers like choice and abundance. But only if the merchandise has the same target market.
What you might ask yourself instead is: do all my merchandise categories fall within a similar price range and target market? For example, if you carry gifts that sell for $59 and also high-end luxury items that sell for $5,900.00 — you could be dealing with a totally different target market for each, requiring different marketing and advertising, different sourcing, different displays, different gift wrapping or packaging, etc. That could sap your resources, because it can be difficult to sell both types of items effectively at the same time. Chances are you’ll do better by sticking to one or the other — modestly priced gifts or luxury gifts, but not both. By the way, you can still have different price ranges (customers like that). Just don’t make the prices too far apart.
Another point for retail: you would want to think carefully before adding divergent revenue streams. Selling merchandise to walk-in shoppers is one thing. But let’s say you want to add a coffee shop corner to your gift shop. And then you decide to get into offering home parties. And you open up a corporate gifts eCommerce store. Now suddenly you have a lot of different revenue streams. Each requires different methods of operation, stocking, marketing and sales. That’s where limiting your revenue streams makes great sense.
I hope this helps, Mitch.
– Anita