Issue #297: Setting Better Targets

This past week we asked all of you to vote in our poll & here are the results:

Setting Profit-Led Targets Based on the Stage of Exit

When setting targets in your business, it's essential to align them with your strategic objectives and stage of ownership. This process, often referred to as being "profit-led," ensures that every decision and target contributes to the financial health and growth of the company. Here, we break down the concept into five critical exits, each representing a different stage in the business lifecycle. These exits guide you through setting appropriate targets and strategies tailored to your business's needs. 🎯 

Exit 1: Income and Expense Management

North Star: Income Growth and Expense Reduction

At the initial stage, the focus should be on maximizing income while minimizing expenses. This foundational step is crucial as it sets the stage for future growth and stability. Here are the key actions:

• Increase Income: Develop strategies to boost revenue through sales, marketing, and new product or service offerings.

• Reduce Expenses: Identify and eliminate unnecessary costs. Streamline operations to enhance efficiency.

• Financial Constraints: Understand your financial limitations and create plans to expand these constraints. This might involve securing additional funding, renegotiating supplier contracts, or improving cash flow management.

Setting clear targets in these areas ensures that your business has a strong financial base to build upon.

Exit 2: Process Mapping and Profitability

North Star: Profitability Per Process

Once you have stabilized your income and expenses, the next step is to optimize your processes. This involves mapping out the customer journey and understanding the profitability of each process. Key focus areas include:

• Map Customer Journey: Detail each step a customer takes from awareness to purchase and beyond. Identify key touchpoints and areas for improvement.

• Revenue vs. Costs: Associate revenue with costs at each process stage. Determine which processes drive revenue and which ones incur significant costs.

• Cost Management: Focus on reducing costs in processes that do not directly contribute to revenue growth or customer retention.

By targeting these areas, you ensure that every part of your business operates efficiently and contributes to overall profitability.

Exit 3: Revenue, Costs, and Productivity

North Star: Profitability Per Person

As your business grows, it becomes essential to look at revenue growth, cost management, employee productivity, and customer lifetime value (LTV). This stage emphasizes the importance of human capital and long-term customer relationships:

• Revenue Growth: Continue to explore new markets, product lines, and sales strategies.

• Cost Management: Maintain rigorous cost control measures and continuously seek cost-saving opportunities.

• Employee Productivity: Invest in training and development to boost employee productivity. Set clear performance targets and track progress.

• Customer LTV: Focus on customer retention strategies to increase the lifetime value of each customer.

Targets in this stage should be set to maximize the contribution of each employee and customer to the business’s profitability.

Exit 4: Financial Allocations

North Star: Profit in Your Pocket

At this stage, it's crucial to adopt a profit-led approach to financial allocations. This involves strategic distribution of profits to ensure the business's long-term sustainability and owner benefits:

• Taxes: Plan for tax obligations to avoid surprises and optimize tax liabilities.

• Distributions: Decide on the distribution of profits to owners and shareholders.

• Operating Compensation: Ensure fair and motivating compensation for key executives and employees.

• War Chest: Build a reserve of funds for future opportunities or unexpected challenges.

• Operational Expenditure (OpEx): Maintain a balance between operational expenses and growth investments.

Setting targets for each of these areas ensures that your business remains financially healthy and prepared for future growth.

Exit 5: Post-Exit Profit Management

North Star: Profit After Exit

Finally, when you are ready to exit the business, the focus shifts to minimizing taxes and managing the use of capital. Key considerations include:

• Minimize Taxes: Work with financial advisors to structure the exit in a tax-efficient manner.

• Terms of Exit: Negotiate favorable terms that maximize your return.

• Use of Capital: Plan how the capital from the exit will be used, whether it's for new ventures, investments, or personal use.

By carefully managing these aspects, you ensure that the exit is not only financially rewarding but also strategically sound.

Trust the Process, Commit to the Journey

Setting profit-led targets requires a clear understanding of your business's stage and strategic objectives. By focusing on income and expense management, process optimization, revenue growth, productivity, and financial allocations, you create a roadmap for sustainable growth and profitability. Trust the process and commit to the journey, knowing that each stage builds upon the last, leading to a successful and profitable exit.

Profit-Led Target Setting Worksheet

Business Information

• Business Name: _________________________

• Owner Name: _________________________

• Current Stage: _________________________

• Date: _________________________

Exit 1: Income and Expense Management

Objectives:

1. Increase income.

2. Reduce expenses.

3. Understand and expand financial constraints.

Targets:

1. Income Growth

   • Current Monthly Revenue: $________________

   • Target Monthly Revenue: $________________

   • Actions to Increase Revenue:

2. Expense Reduction

   • Current Monthly Expenses: $________________

   • Target Monthly Expenses: $________________

   • Actions to Reduce Expenses:

3. Expand Financial Constraints

   • Key Financial Constraints:

   • Actions to Expand Constraints:

Exit 2: Process Mapping and Profitability

Objectives:

1. Map out customer journey processes.

2. Associate revenue with costs.

3. Focus on revenue growth and cost management.

Targets:

1. Customer Journey Mapping

   • Key Customer Journey Stages:

   • Improvements Needed:

2. Revenue vs. Costs Analysis

   • Processes with High Revenue Impact:

   • Processes with High Cost Impact:

   • Actions to Optimize:

3. Cost Management Focus

   • Non-Revenue Generating Costs:

   • Actions to Reduce Costs:

Exit 3: Revenue, Costs, and Productivity

Objectives:

1. Grow revenue.

2. Manage costs.

3. Improve employee productivity.

4. Increase customer lifetime value (LTV).

Targets:

1. Revenue Growth

   • Current Monthly Revenue: $________________

   • Target Monthly Revenue: $________________

   • Growth Strategies:

2. Cost Management

   • Current Monthly Expenses: $________________

   • Target Monthly Expenses: $________________

   • Cost Reduction Strategies:

3. Employee Productivity

   • Current Productivity Level: ___________________

   • Target Productivity Level: ___________________

   • Improvement Actions:

4. Customer LTV

   • Current Customer LTV: $________________

   • Target Customer LTV: $________________

   • Retention Strategies:

Exit 4: Financial Allocations

Objectives:

1. Adopt profit-led financial allocations.

2. Build financial reserves.

3. Optimize operating expenses.

Targets:

1. Tax Planning

   • Current Tax Liability: $________________

   • Target Tax Liability: $________________

   • Tax Optimization Actions:

2. Profit Distributions

   • Current Distribution Amount: $________________

   • Target Distribution Amount: $________________

   • Distribution Plan:

3. Operating Compensation

   • Current Compensation Structure: ___________________

   • Target Compensation Structure: ___________________

   • Compensation Adjustments:

4. War Chest

   • Current Reserve Amount: $________________

   • Target Reserve Amount: $________________

   • Reserve Building Strategies:

5. Operational Expenditure (OpEx)

   • Current OpEx: $________________

   • Target OpEx: $________________

   • OpEx Management Actions:

Exit 5: Post-Exit Profit Management

Objectives:

1. Minimize taxes.

2. Optimize terms of exit.

3. Plan use of capital post-exit.

Targets:

1. Tax Minimization

   • Current Tax Plan: ___________________

   • Target Tax Plan: ___________________

   • Actions to Minimize Taxes:

2. Terms of Exit

   • Desired Exit Terms:

   • Negotiation Strategies:

3. Capital Use Plan

   • Post-Exit Capital: $________________

   • Planned Use of Capital:

By filling out this worksheet, business owners can set clear, actionable targets that align with their stage of business development and strategic goals.