To be successful in our small business we need an effective business plan. That plan should contain a set of clear objectives against which we can measure our progress. In this way, we can determine whether we are exceeding all our expectations, getting along OK or getting to the stage where we should think of doing something else.
What Do We Mean By Objectives
Before looking at the sort of objectives we might want to set, let's think about objectives in general. For an objective to be meaningful, it needs to be SMART. That means it should be Specific, Measurable, Achievable, Relevant and Time-related.
Specific: A statement of exactly what we want to achieve. For example 'to increase the number of customers of customers buying our services' or 'to increase the number of services that each customer purchases' are more specific than 'to increase our level of business'.
Measurable: This implies a quantitative target which allows us to know clearly whether it has been achieved or not. For example 'to add five new customers' or 'to develop three additional products' are measurable targets.
Achievable: Although objectives should stretch us, there is no point in setting ones that have no hope of being successful that's just demotivating and a waste of time. For example 'to increase profit by 500% in year one' is probably not going to be achievable (unless we've discovered the next 'big thing') whereas 'to increase profit by 100%' is probably achievable but difficult.
Relevant: It is important that the objective is meaningful. For example 'to spend 20 hours per week writing the website' is specific, measurable and achievable, but unless it is linked to an increase in business, it is an irrelevance.
Time-related: Each objective needs to have a time-frame against which is should be measured. For example 'to increase profit by 100%' without the addition of 'in year one' is meaningless. Sure, we can do it at some point, but if we don't have a milestone to work to, it could take 35 years and that's not a particularly stretching objective, is it?
As we go through our business plan, we'll look at examples of SMART and not-so-SMART objectives.
What Business Am I In?
If we don't know what our business is, then no-one else will know or care. So we start by clearly defining what it is we wish to do. 'I want to be a writer' is an aspiration. So is 'I want to work with children' or 'I want to be in the open air'.
To be more specific, how about 'I want to write articles about sport for newspapers'. Maybe 'I want to work with children of pre-school age in my own home'. Finally, what about 'I want to work as a gardener for people with large gardens and no time'.
Once we have a clear view of what we want to do, we can start planning and setting our objectives.
Who Are My Customers?
We need to know who are potential customers are, so that we can target them effectively. Thanks to the internet, a sports writer can reach any newspaper in the country or even in other countries. However, if we are only going to cover sporting events in our own county or state then our copy will only be of interest to local newspapers and we should be looking to target these. Similarly, if we are going to run a play-school in our own home, the families need to live close enough to do the drop off on the way to work. This will define our potential market. On the other hand, if as gardeners, we are willing to travel long distances for the right job, then we can reach a much bigger market.
Setting Objectives
OK, so we now have a clear idea of what we're going to do and to whom we're going to sell. We can now start setting our SMART objectives. These can be of two types the financial and the non-financial.
Financial Objectives
It is rare that a small business makes lots of money straight away (and many will never achieve more than a reasonable income). However, we need to set our objectives in the expectation that we will make money otherwise why are we bothering.
So, a non-SMART objective would be: we want to not lose money in year 1 and make a profit from year 2 onwards. What does this mean? What constitutes a loss? How will we know when we've made a profit? To turn this into a SMART objective, we need a cash-flow budget. We need to know how much we will charge for our services. We also need to know what it will cost us to provide those services.
Costs can be divided into two types: Fixed and variable. Fixed costs are the ones that are incurred irrespective of the level of business carried out. This would include rent, wages and marketing costs. Variable costs are the ones that relate directly to the level of business. These include materials and mileage.
So to break even in year 1 we need to generate sufficient income to cover all fixed costs plus the variable costs for that level of business.
To make a profit in year 2, we need to generate a surplus once fixed and variable costs have been covered. Let's look at the math.
Say our fixed costs are $1000. Our variable costs are $50 per customer. We sell our service for $100. This means that in year 1, we need to provide services to 20 customers in order to break even:
Income: 20 x 100 = 2000; Fixed costs: 1000; Variable costs: 20 x 50 = 1000
If our fixed and variable costs remain the same in year 2, then from customer 21 onwards, we are generating $50 of profit per transaction.
So a SMART objective could be: In year 1 we will service 20 customers with one transaction each, charging $100 per time. This gives us a specific objective, which can be measured, hopefully is achievable and is certainly relevant and time-related.
Other financial objectives could relate to the numbers of new customers, new product development or measures for keeping costs under control.
Non-Financial Objectives
Of course, business is not just about finances, although they are a key factor. Remember why we wanted to work for ourselves. Maybe we wanted more time to spend with the family; or to be able to put time aside for other things. If these are important factors, then they should also be the subject of objectives. For example 'to take one afternoon each month for swimming with the kids' or 'to clear three hours every week to work on that novel'. Whatever our reasons for running a small business (and everyone's reasons are different), setting SMART objectives, writing them down and measuring ourselves against them periodically will give us a better chance of fulfilling our ambitions.