Goals have to be personalized to your organization. While the majority of businesses may choose to set a sales goal¾as dollars or percentage increase¾the actual goal amount has to be set based on the current results, capabilities, resources, and long-term vision for the organization.
The basis for growth is the current state, structure, and capacity of the organization. It is a function of available resources to serve more customers, produce more units, and execute the back office and support services to deliver to your customers’ expectations. So where do you start? Here is a simplified process to follow:
First, evaluate your financial results for the at least two years. Look at the trends of sales, margins, and profits. Dig into the details to find out what are your best selling services or products (revenues and profits). Identify the most profitable customers, frequency and size of average sale, etc.
Second, analyze your organizations existing capacity. You want to know how much capacity you have available to serve more customer/produce more units of what you sell (product units or services hours). If you have limited unused capacity, then develop an understanding (and at least estimates) of what it would cost to add more capacity and how long it will take.
Third, take the average sale size or unit cost and calculate the value of your unused current capacity. This will give you an indication of the dollar value of incremental sales. Also, apply your average profit percentage to understand potential profits.
Fourth – and this is arguably the most critical aspect to growth – check your cash balances and cash conversion rate. Growth takes cash. So it is critical to know if you generate sufficient cash to meet the cash demand of the growing organization. The cash conversion cycle is how long it takes from the time you spend money to obtain resources of production (e.g., materials, labor) to the time you collect cash payment from the customer. Often, sales growth can be generated by giving more favorable payment terms, which gets the sale, but postpones the cash. During your cash flow analysis identify your highest and lowest monthly cash demands (expenses), and evaluate payment terms and policies¾dig into the details of your business. Know the sustainable level of sales you can support with your current (or expanded by new capacity) cost structure.
However, keep in mind that growth can kill your business. Yes, you read that right. There are companies that grew so rapidly that they surpassed their ability to generate the cash to pay the bills. They miscalculated the timing of cash flow. They failed to obtain or maintain working capital lines of credit and other sources of temporary capital. In other words, smart growth is crucial.
The best growth goals, for a company, include a sales, profit, and cash on hand or cash reserve and are based on a sustainable growth rate. Sustainable growth is that which the company can fund from operational cash flow or that can be supported with external borrowing that helps address the timing of cash flowing into the business.