How a Lack of Financial Goals Can Impact a Business
Financial goals are key for your business
Articulating tangible financial goals is an essential aspect of creating a successful and productive business. When businesses clearly define and measure their objectives it’s a step forward to operational excellency. It allows businesses to improve their planning, adapt their style of management, analyze approaches, and develop strategy. Examples of financial goals include:
- Increases to revenue.
- Reductions to costs.
- Improvement of margins.
- Management of debt service.
- Cash flow planning.
All of these collectively add to a larger financial goal. Financial operational excellence. And failure to consider these can be potentially damaging to your business model.
Lack of financial expertise
One of the principal reasons businesses neglect setting tangible financial goals is due to a lack of expertise in doing so. Some business owners venture into unfamiliar territory. Therefore, they cannot use measurable objectives that to analyze in order to make improvements to the way in which their organization operates.
Then, if they do decide to set financial goals, their lack of knowledge may cause them to set too many variables. This can make their financial goals too difficult to make sense of. Furthermore, a change in one objective always warrants a trade-off with another. They fail to understand the interdependent nature of financial goals. Instead, often businesses choose to set these goals them without taking into consideration the role of other departments. This will ultimately lead to an unsuccessful strategy and useless results.
Return on Investment
Another issue with regards to setting tangible financial goals concerns ROI. As well as business owners’ understanding of it. ROI (Return on Investment) is a performance measure used to evaluate the efficiency and the amount of return on a particular investment, relative to how much the investment has cost. The formula for working out ROI is done by taking away the cost of the investment from the current value of the investment and dividing it by the cost of the investment.
According to a study published in the Harvard Business Review titled ‘Financial Goals and Strategic Consequences’, the author Gordon Donaldson highlights the complexity inherent in any well-designed strategy involving financial objectives. He emphasizes that due care that is required in the selection of those objectives. He states that a significant conflict of goals arises when companies decide to quantify their ROI targets. Often they chose these targets almost at random. Simply because they exceed previous performance.
Overall, for a business to be successful they need a strategy in place that allows them to set clear, definable, and tangible financial goals. Goals that can be measured to improve performance. One of the principal reasons that small businesses fail to get off the ground is due to a lack of capital. Which stems from a failure to set realistic financial objectives from the start.
Business owners who do not fully appreciate the interdependence inherent in financial goals, and views them as a separate entity, ultimately risks the entire success and long-term prospects of a company. By not considering any potential setbacks, you risk losing out with potentially damaging results to your business model and reputation as a whole.